A liquidity ratio that measures a company's ability to pay its short-term obligations using its short-term assets.
The current ratio is one of the most commonly used financial health indicators. It answers: 'Can this company pay its bills due in the next 12 months?' A ratio above 1.0 means the company has more current assets than current liabilities. Banks often use current ratio as a criterion for loan approval. However, a very high ratio (above 3.0) might indicate the company isn't using its assets efficiently.
A company has current assets of ₹20,00,000 (cash + receivables + inventory) and current liabilities of ₹12,00,000 (payables + short-term loans). Current Ratio = 1.67, indicating healthy liquidity.
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
1.5 to 2.0 is generally healthy. Below 1.0 is risky (more liabilities than assets). Above 3.0 may mean excess idle cash or inventory. Industry norms vary significantly.
Quick ratio (acid-test) excludes inventory from current assets, since inventory may not be quickly convertible to cash. Quick Ratio = (Current Assets − Inventory) ÷ Current Liabilities.
The difference between a company's current assets and current liabilities, representing the short-term liquidity available for day-to-day operations.
A stricter liquidity measure than the current ratio, excluding inventory from current assets to show a company's ability to meet short-term obligations with its most liquid assets.
A financial statement that shows a company's assets, liabilities, and equity at a specific point in time.
Let Laabam.One handle the complexity. From invoicing to GST filing, our ERP software makes accounting effortless.