Current Ratio

• Current Ratio


  current assets/current liabilities

  All found on balance sheet

  current assets = debtors, cash, stock

  current liabilities = creditors, overdraft
• Example 


  Debtors 5, cash 5, stock 2 = 10

  Creditors 4, overdraft 1 = 5

  10/5= 2

  Suggests

  good liquidity

  good working capital
• Low Number, less then 1


  0.5

  unable to cover short term liabilities e.g can’t pay overdraft and creditors

  means you have

  • poor liquidity
  • poor working capital management
• High Number, really high

  10

  Reasons

  • debtors - to slow chasing up debts
  • cash - could you be doing something better with it
  • stock - why have you got so much stock
  • means you have good liquidity but poor working capital management