Current Ratio = Current Assets / Total Current Liabilities
- It shows the ability of the company to meet its short-term obligations using assets that can be converted into cash within the period of maturity of its obligations.
- The more predictable the cash inflows of a company are, the lower the ratio is generally acceptable, although this is mainly a function of the industry to which the company belongs.
- The higher the ratio, the greater the “margin of safety” of the company’s short-term creditors.
Business actions to improve the Index
- Increase in Total Current Assets, i.e. Inventories, Receivables and Cash without a corresponding increase in liabilities
- Reduce Total Short-Term Liabilities through repayment of Balances, or through Restructuring of Debt in favor of Long-Term
