Posted in Finance, Accounting and Economics Terms, Total Reads: 856
Definition: Current Ratio
Liquidity ratio compares those assets which can be quickly converted into cast at the going market price, i.e. the liquid assets, with the current liabilities. Current ratio is one of the liquid ratios. It is calculated by dividing current assets with current liabilities.
Current assets include cash, marketable securities, accounts receivables, inventories etc. Current liabilities include accounts payable short-term notes payable, accrued taxes, other accrued expenses etc.
If Current assets are rising faster than current liabilities, the current ratio will increase. This is the single and a healthy indicator of the extent to which the claims of short-term creditors are covered by liquid assets. It is a measure of short term solvency. But a very high current ratio could also mean unproductive assets and inefficiency.
Therefore the optimum current asset ratio varies from industry to industry. The firm’s current ratio must be generally in sync with the industry current asset ratio.