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Definition — what does that mean?
Current assets divided by current liabilities: whether what the company can turn into cash within a year covers what it has to pay within a year.
In Swedish: Balanslikviditet
CR
Current assets divided by current liabilities: whether what the company can turn into cash within a year covers what it has to pay within a year. In Swedish accounts it is usually written in per cent, so 1.5 is 150 %.
CR=1.5
CR equals 600,000 divided by 400,000, equals 1.5
You are given
Round to 2 decimals.
CA is the current assets: cash, receivables, inventory and anything else expected to become money within a year. CL is the current liabilities: what falls due within a year. The ratio is how many times over the one covers the other.
Current assets of 600,000 against current liabilities of 400,000: CR = 600,000 / 400,000 = 1.5, or 150% where the ratio is written as a percentage. The company has 1.5 of near-cash for every 1 it owes soon. Turned round, a company that wants to keep a ratio of 1.5 with 400,000 of short debt needs current assets of 600,000.
Below 1 the short debts exceed what can be raised to pay them, and the company depends on new sales or new borrowing to get through the year. Above 1 there is cover; well above it there may be idle cash or slow stock. What counts as comfortable differs by industry: a supermarket turning its stock weekly runs on a lower ratio than a machine builder with a year of work in progress.
The current ratio counts inventory as if it could be sold tomorrow at book value. The quick ratio leaves the inventory out, and the cash ratio counts only money in hand. The three are read together: a current ratio of 1.5 with a cash ratio of 0.1 is a company whose cover is mostly stock.
Is the current ratio the same as working capital?
Same two figures, different arithmetic: working capital is CA − CL, an amount,
and the current ratio CA / CL, a multiple.
Why is it sometimes written as a percentage?
Swedish accounts give it as balanslikviditet in per cent: 1.5 is 150%. The number is the same.
What is a good current ratio?
One that covers the debts with room for the slowest assets, and in line with the industry. A rule of
thumb of 2 is quoted; it suits some businesses and starves others.
| Solve for | Rearranged | With the numbers | Comes to |
|---|---|---|---|
| CA | CRCL | 1.5·400,000 | 600,000 |
| CL | CACR | 600,0001.5 | 400,000 |
| CR | CACL | 600,000400,000 | 1.5 |
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