Current ratio meaning in simple words: can it pay its bills?
Current ratio: a company's current assets divided by its current liabilities: how many rupees it has coming in within a year for every rupee it must pay out.
The story
two people, one chai stall
A bank sends a form for a new van loan. One box asks for the "current ratio". Sameer reads it twice.
SameerCurrent as in electricity?
RiyaCurrent as in "within a year". It compares what turns into cash within a year with what we must pay within a year.
SameerWhat do we have?
RiyaStock worth ₹5 crore, ₹5 crore owed by café customers and ₹55 crore of cash. ₹65 crore in all.
SameerAnd what do we owe soon?
Riya₹10 crore to suppliers and ₹5 crore of other bills. ₹15 crore. So 65 divided by 15 is about 4.3.
SameerFour rupees for every rupee due. Very safe.
RiyaAlmost too safe. That's mostly IPO cash sitting idle. Take the cash out and we have only ₹10 crore against ₹15 crore of bills.
SameerShould I panic?
RiyaNo. Chai is paid for the moment it's poured, and suppliers give us weeks. Cash keeps coming in faster than bills fall due.
The grown-up version
same idea, exact words
The current ratio divides current assets (cash, receivables, inventories and other assets expected to be realised within twelve months or the operating cycle) by current liabilities (amounts due within the same period, including the current portion of long-term borrowings). It is a broad test of short-term liquidity. A ratio below 1 is not always a warning: businesses that collect cash at once and pay suppliers later often run one comfortably. The quick ratio is a stricter version that leaves out inventories.
Formula
Current ratio = Current assets ÷ Current liabilities
Which rule asks for itSchedule III to the Companies Act, 2013 (Division II, Part I, Additional Regulatory Information, item (xiv)), inserted by MCA notification G.S.R. 207(E) of 24 March 2021: the current ratio is one of 11 ratios companies must disclose, with the items in the numerator and denominator and an explanation of any change of more than 25% from the previous year.
Spot it in the wild
a real annual report, a real page
- Current ratio: 3.04. About ₹3 of current assets for every ₹1 due within a year.
- ITC skips the debt ratios: it says it's virtually debt-free.
Don't mix it up
the usual confusions
Current ratio ≠ working capital
Working capital subtracts: 65 − 15 = ₹50 crore for Sameer Chai. The current ratio divides: 65 ÷ 15, about 4.3. Same two numbers, different question.
Current ratio ≠ debt-to-equity ratio
Debt-to-equity is about how the whole business is funded. The current ratio is only about the next twelve months.
Current ratio ≠ quick ratio
The quick ratio leaves stock out, because milk and tea can't pay a bill until they're sold. Sameer Chai: (65 − 5) ÷ 15 = 4.
Three quick sips
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Hindi mein
करंट रेशियो (चालू अनुपात)
करंट रेशियो बताता है कि साल भर में चुकाने वाले हर ₹1 के मुक़ाबले कंपनी के पास साल भर में नकद बनने वाली कितनी संपत्ति है।