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Answer Posted / viswanatha reddy
Definition
An indication of a company's ability to meet short-term debt
obligations; the higher the ratio, the more liquid the
company is. Current ratio is equal to current assets divided
by current liabilities. If the current assets of a company
are more than twice the current liabilities, then that
company is generally considered to have good short-term
financial strength. If current liablities exceed current
assets, then the company may have problems meeting its
short-term obligations. For example, if XYZ Company's total
current assets are $10,000,000, and its total current
liabilities are $8,000,000, then its current ratio would be
$10,000,000 divided by $8,000,000, which is equal to 1.25.
XYZ Company would be in relatively good short-term financial
standing.
Formula:
Following formula is used to calculate current ratio:
[Current Ratio = Current Assets / Current Liabilities]
Or
[Current Assets : Current Liabilities]
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