The current ratio is depicted as another important aspect of ‘Liquidity Ratio’ and ‘Working Capital’ as it marks out the correct proportion of current assets that are available in the business setup in according with the current liabilities. It should be in our best interest that current ratio is quite essential, especially for the companies that are siege with creditors to make payments immediately.
In fact, it expresses the on-going trend for the current assets and their potential to pay out the current liabilities of a business within a time month’s timeframe.
It includes all the assets that are supposed to be realized within a year. Moreover, if the current ratio showcases an amount of ‘2’ then it indicates that the company is potentially strong to cover up its short-term liabilities twice a times.
Formula For Evaluating Current Ratio:
The current ratio is evaluated through this formula which encapsulates the number of current liabilities along with the current assets. Current Ratio = Current Assets Divided By Current Liabilities.
The main objective behind maintaining the current ratio of any company is to embark to a milestone where organizations can cover up their short-term liabilities as well as obligations associated with this scenario.
The importance of having the right current ratio for any company is essential, it is considered as the primary measure of an organization’s liquidity. Furthermore, if the current ratio is not up to the mark then it is elaborated into loan covenants in order to safeguard the interest of all the lenders, because it can also replenish the financial stability of the borrowers accordingly. According to a research, most countries in the world have set up a specific current ratio for financial institutions in order to lend credit to the companies and remain on the safer side.