Current ratio

• What is the formula for the current ratio?

  Current assets over current liabilities
• Why is the current ratio sometimes called the liquidity ratio?

  It measures how liquid your company is
• If debtors are 3, cash is 5, and stock is 2, what are the total current assets?

  10
• If creditors are 4 and overdrafts are 1, what are the total current liabilities?

  5
• What is the current ratio if current assets are 10 and current liabilities are 5?

  2.0
• What does a current ratio of 2 suggest about a company's liquidity?

  It has good liquidity and working capital
• What is the benchmark range for a healthy current ratio?

  Between 1.5 and 2.5
• What does a current ratio less than 1 indicate?

  Inability to cover short-term liabilities
• What issues does a low current ratio indicate?

  Massive cash flow issues and poor liquidity
• What does a very high current ratio suggest?

  Possible poor working capital management
• If a company has a current ratio of 10, what does this imply about its current assets?

  They are very high compared to liabilities
• Why might a company with high current assets need to manage them better?

  To improve working capital efficiency
• What are the implications of having a current ratio of 10?

  • Good liquidity
  • Covering liabilities 10 times over
  • Potential poor working capital management