How Do You Evaluate The Current Ratio Of Any Company?


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Adnan Manzoor Profile
Adnan Manzoor answered
Current Ratio is calculated by dividing the current assets on a company's balance sheet by the current liabilities on the balance sheet of a company. Roughly, it tells us about the availability of liquid assets which can be readily sold to pay off company's immediate liabilities or liabilities which falls due within one year. Ideally, the current ratio should be in the range of 1:1 which means for every 1 dollar of liability a company should have at least 1 dollar in its readily realizable assets to pay off that 1 dollar liability bill.
There are different perspectives through which we can interpret the results of current ratio. For a banker it is something which gives insight into the repayment capacity of his borrower (whether the borrower will be able to pay the loan which he has acquired from him from his own resources in near future or not).
There are different views as to up to what extent the current assets should be carried in the balance sheet of any company because current assets are non productive assets and carrying large amount of non productive assets may stuck a company's valuable funds and resources into potentially unprofitable areas of business.

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