Current Ratio
Current Ratio is simply current assets divided by current
liabilities. Current assets include cash, accounts receivable, marketable
securities, inventories, and prepaid items. Current liabilities include accounts
payable, notes payable, salaries payable, taxes payable, current maturity's of
long-term obligations and other current accruals.
EXAMPLE - Current Assets are $ 200,000 and Current
Liabilities are $ 80,000. The Current Ratio is $ 200,000 / $ 80,000 or 2.5. We
have 2.5 times more current assets than current liabilities.
A low current ratio would imply possible insolvency problems.
A very high current ratio might imply that management is not investing idle
assets productively. Generally, we want to have a current ratio that is
proportional to our operating cycle. We will look at the Operating Cycle as part
of Efficiency Ratios.
