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Current ratio

Assesses the business’s liquidity position by comparing current assets to current liabilities. It measures how many current assets the firm has for every one current liability. It is calculated by dividing current assets by current liabilities and is expressed in the form of a ratio eg 2 to 1. For example, if a business’s current assets amounted to £389,000 and current liabilities amounted to £243,000, then the current ratio would be 1.6 : 1 (389,000 / 243,000). Accountants suggest that the ideal is 1.5 to 2 : 1. The latter means that for every £2 of short-term assets, the business has £1 of short-term debt. Below this figure there is a danger that the business will not have enough cash to pay off debts as they fall due, particularly if current assets consist of a very high proportion of inventories (stocks).

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