Current Ratio
Measures a firm’s short-term ability to pay its bills.
\text{Current Ratio} = \dfrac{\text{Current Assets}}{\text{Current Liabilities}}
1What it means
The current ratio checks whether a business has enough short-term assets to cover its short-term debts. A ratio around 2:1 is generally considered healthy.
2Variables
| Symbol | Meaning |
|---|---|
| \text{Current Assets} | Cash and assets convertible within a year |
| \text{Current Liabilities} | Debts due within a year |
3Worked examples
Example 1 Worked solution
Q. Current assets are ₹4,00,000 and current liabilities ₹2,00,000. Find the current ratio.
- Current Ratio = Current Assets / Current Liabilities.
- = 4,00,000 / 2,00,000.
✓ 2 : 1
4Where it's used
- ✦Assessing liquidity and financial health.
- ✦Comparing firms before lending or investing.
5Tips & common mistakes
- !A very high ratio can mean idle, unused cash.
- !Express the answer as a ratio (e.g. 2 : 1), not just a number.