Liquidity - current ratio

• Overall


  Comes from the balance sheet

  Rough measure of how easily a business can meet its current liabilities

  Indicates the ability to meet short term debt

  Provides a guide to the liquidity situation

  Is also called the Working Capital

  The suggested ratio is 2:1

  Businesses dealing in mainly cash could have a lower figure 1.5:1
• What does it indicate


  Is the figure is high, it would indicate that the assets of the firm are not being employed efficiently

  If the ratio is too low, reduce current liabilities with equity funding, non-current assets could be sold to increase current assets, factoring and leasing would also free up current assets, the sales of inventory would make current assets more available (more liquid). Emergency short term measures would include an overdraft and using more credit facilities