Current ratio

The current ratio is an accounting ratio. It is usually defined as current assets divided by creditors falling due within one year. The ratio is designed to assess the solvency of a business in the short term. If the current ratio exceeds one, then the value of current assets is greater than the value of the short term creditors, indicating that the business is able to pay its short term debts as they fall due. Note that this interpretation is fairly simplistic and the resulting ratio depends on the nature of the market in which the business operates. For example, supermarkets usually have a current ratio of less than one since they do not sell goods on credit (i.e. minimal trade debtors) yet have large ongoing balances owed to trade creditors. The most important judgement applied to this ratio (and other similar liquidity ratios) is in understanding the reasons for any significant deterioration in the ratio.

 

reference: Business Studies / Accounting. Accounts & Finance Glossary. Jim Riley BA(Hons) MBA FCA // tutor2u

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