In the last blog, we understood the utility of ratios in analyzing the financial status of the company. From today over the next few blogs, we would understand some of the various financial ratios better. In today's blog we deal about current ratio.
Current Ration = Current Assets / Current Liabilities
If we look at this ration, we understand that it deals which how the current (what is at immediate disposal - if we can take it in that sense) assets could be used to handle the current liabilities. It measures the firm's ability to repay the immediate liabilities (say the bills and notes) using the assets (say cash) that is immediately available.
It is always good to be able to pay off the liabilities that we need to pay at the earliest hence this ratio would be greater than one - clearly, the numerator has to be greater than the denominator or the assets have to be more than the liability.
If this ratio is less than 1, it is an indication of a possible cash crunch! The liability to be paid off is more than the cash that is currently available with the company.
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