Tuesday, 4 June 2013

The current ratio: Balance sheet liquidity

The current ratio is a short term liquidity test to see if a company has the "cash" to pay its obligations. 

In book keeping the current ratio compares the current assets to the current liabilities of a company. The current ratio is one way lenders test your cash flow when they consider loaning you money. Lenders usually look for current ratios of 1.2 to 2, so any financial institution would consider this example’s current ratio of 2.36 to be a good sign. A current ratio under 1 is considered a danger sign because it indicates that the company doesn’t have enough cash to pay its current bills.


Current assets of $56000
Current Liabilities of $26000
= a current ratio of 2.1

Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".

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