6.7What is the Current Ratio?
1What is it?
The current ratio compares what the company owns that turns into cash within a year (current assets) with what it owes within a year (current liabilities).
2Why does it exist?
It checks short-term safety: can the company pay its bills over the next 12 months?
3Diagram
High value means…
Comfortable liquidity. But too high may mean idle cash or slow-moving stock.
Low value means…
Below 1 may mean difficulty paying short-term obligations.
Is high or low good?
Around 1.2–2 is generally healthy for many industries.
4Calculation
Current ratio = Current assets ÷ Current liabilities
- Current assets = ₹3,000 cr; current liabilities = ₹2,000 cr.
- Current ratio = 1.5.
₹1.50 of short-term assets for every ₹1 of short-term bills.
5Risks
- Inventory may not convert to cash easily.
- Some strong businesses (retail, FMCG) operate safely below 1.
6Practical use
Always compare a ratio with (1) the company’s own history and (2) other companies in the same industry. A single number on its own means little.
7Quick revision
- Current assets ÷ current liabilities.
- Measures short-term safety.
- 1.2–2 often healthy.
8Knowledge check
Q1. CA ₹500 cr, CL ₹600 cr. Current ratio?Show answer
0.83.
Q2. What does it measure?Show answer
Ability to pay short-term obligations.
Q3. Is a ratio of 5 always great?Show answer
Not necessarily; it may indicate idle resources.
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