Sana Securities

Current Ratio

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Current Ratio

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� What does the Current Ratio indicate?

Current Ratio indicates in percentage terms the working capital (i.e. current

assets – current liabilities) with which the company conducts its business

operations.

� Current Asset: Current assets include cash and liquid assets that can be

readily converted to cash such as accounts receivable, inventory, marketable

securities, prepaid expenses etc.

� Current Liabilities: Current liabilities are obligations of a company which

are due within one year and include short term debt, accounts payable,

accrued liabilities and other debts of similar nature.

� Higher Current Ratio means higher short term liquidity comfort level.

� A Current Ratio below 1 shows that the company may not be able to meet its

obligations in the short run.

� However, it is not always a matter of worry if the Current Ratio temporarily

falls below 1 as companies often squeeze out short term cash sources to falls below 1 as companies often squeeze out short term cash sources to

achieve a capital intensive plan with a longer term outlook. (Explained in next

slide)

New schedule VI

It requires all companies to disclose the current assets and current

liabilities under separate heads on the balance sheet making it easy to

calculate the Current Ratio and measure the working capital available to

the company.the company.