3Current Ratiohttp://www.investopedia.com/terms/c/currentratio.aspDEFINITION OF 'CURRENT RATIO'A liquidity ratio that measures a company's ability to pay short-term obligations.Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".INVESTOPEDIA EXPLAINS 'Current Ratio'The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. Because business operations differ in each industry, it is always more useful to compare companies within the same industry.This ratio is similar to the acid-test ratio except that the acid-test ratio does not include inventory and prepaids as assets that can be liquidated. The components of current ratio (current assets and current liabilities) can be used to derive working capital (difference between current assets and current liabilities). Working capital is frequently used to derive the working capital ratio, which is working capital as a ratio of sales.Want to learn more about how to use Current Ratio? Take a look at --Liquidity Measurement Ratios: Current RatioandHow To Analyze A Company's Financial Position.Liquidity Measurement Ratios: Current Ratiohttp://www.investopedia.com/university/ratios/liquidity-measurement/ratio1.aspThecurrent ratiois a popular financial ratio used to test a company'sliquidity(also referred to as its current orworking capitalposition) by deriving the proportion of current assets available to cover current liabilities.

The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). In theory, the higher the current ratio, the better.

As of December 31, 2005, with amounts expressed in millions, Zimmer Holdings' current assets amounted to $1,575.60 (balance sheet), which is the numerator; while current liabilities amounted to $606.90 (balance sheet), which is the denominator. By dividing, the equation gives us a current ratio of 2.6.

Variations:NoneCommentary:The current ratio is used extensively in financial reporting. However, while easy to understand, it can be misleading in both a positive and negative sense - i.e., a high current ratio is not necessarily good, and a low current ratio is not necessarily bad (see chart below).

Here's why: Contrary to popular perception, the ubiquitous current ratio, as an indicator of liquidity, is flawed because it's conceptually based on the liquidation of all of a company's current assets to meet all of its current liabilities. In reality, this is not likely to occur. Investors have to look at a company as a going concern. It's the time it takes to convert a company's working capital assets into cash to pay its current obligations that is the key to its liquidity. In a word, the current ratio can be "misleading."--Company ABCCompany XYZ

Current Assets$600$300

Current Liabilities$300$300

Working Capital$300$0

Current Ratio2.01.0

Company ABC looks like an easy winner in a liquidity contest. It has an ample margin of current assets over current liabilities, a seemingly good current ratio, and working capital of $300. Company XYZ has no current asset/liability margin of safety, a weak current ratio, and no working capital.However, to prove the point, what if: (1) both companies' current liabilities have an average payment period of 30 days; (2) Company ABC needs six months (180 days) to collect its account receivables, and its inventory turns over just once a year (365 days); and (3) Company XYZ is paid cash by its customers, and its inventory turns over 24 times a year (every 15 days).In this contrived example, Company ABC is veryilliquidand would not be able to operate under the conditions described. Its bills are coming due faster than its generation of cash. You can't pay bills with working capital; you pay bills with cash! Company's XYZ's seemingly tight current position is, in effect, much more liquid because of its quicker cash conversion.

When looking at the current ratio, it is important that a company's current assets can cover its current liabilities; however, investors should be aware that this is not the whole story on company liquidity. Try to understand the types of current assets the company has and how quickly these can be converted into cash to meet current liabilities. This important perspective can be seen through thecash conversion cycle(read thechapter on CCCnow). By digging deeper into the current assets, you will gain a greater understanding of a company's true liquidity.Current Ratio - Liquidity Ratio - Working Capital Ratio http://accounting-simplified.com/financial/ratio-analysis/current.html1. DefinitionCurrent ratio, also known as liquidity ratio and working capital ratio, shows the proportion of current assets of a business in relation to its current liabilities.3. ExplanationCurrent ratio expresses the extent to which the current liabilities of a business (i.e. liabilities due to be settled within 12 months) are covered by its current assets (i.e. assets expected to be realized within 12 months). A current ratio of 2 would mean that current assets are sufficient to cover for twice the amount of a company's short term liabilities.

4. ExampleABC PLC has the following assets and liabilities as at 31st December 2012:$m$m

Non Current Assets

Goodwill75

Fixed Assets75150

Current Assets

Cash in hand25

Cash in bank50

Inventory25

Receivable100200

Current Liabilities

Trade payables100

Income tax payables60160

Non Current Liabilities

Bank Loan50

Deferred tax payable2575

5. Interpretation & AnalysisCurrent ratio is a measure of liquidity of a company at a certain date. It must be analyzed in the context of the industry the company primarily relates to. The underlying trend of the ratio must also be monitored over a period of time.Generally, companies would aim to maintain a current ratio of at least 1 to ensure that the value of their current assets cover at least the amount of their short term obligations. However, a current ratio of greater than 1 provides additional cushion against unforeseeable contingencies that may arise in the short term.Businesses must analyze their working capital requirements and the level of risk they are willing to accept when determining the target current ratio for their organization. A current ratio that is higher than industry standards may suggest inefficient use of the resources tied up in working capital of the organization that may instead be put into more profitable uses elsewhere. Conversely, a current ratio that is lower than industry norms may be a risky strategy that could entail liquidity problems for the company.Current ratio must be analyzed over a period of time. Increase in current ratio over a period of time may suggest improved liquidity of the company or a more conservative approach to working capital management. A decreasing trend in the current ratio may suggest a deteriorating liquidity position of the business or a leaner working capital cycle of the company through the adoption of more efficient management practices. Time period analyses of the current ratio must also consider seasonal fluctuations.

6. Industry standardsCurrent ratio must be analyzed in the context of the norms of a particular industry. What may be considered normal in one industry may not be considered likewise in another sector.Traditional manufacturing industries require significant working capital investment in inventory, trade debtors, cash, etc, and therefore companies operating in such industries may reasonably be expected to have current ratios of 2 or more.However, with the advent of just in time management techniques, modern manufacturing companies have managed to reduce the size of buffer inventory thereby leading to significant reduction in working capital investment and hence lower current ratios.In some industries, current ratio of lower than 1 might also be considered acceptable. This is especially true of the retail sector which is dominated by giants such as Wal-Mart and Tesco. This primarily stems from the fact that such retailers are able to negotiate long credit periods with suppliers while offering little credit to customers leading to higher trade payables as compared with trade receivables. Such retailers are also able to keep their own inventory volumes to minimum through efficient supply chain management.Current ratios of Wal-Mart Stores, Inc and Tesco PLC as per 2011 annual reports are 0.88 and 0.65 respectively.

7. ImportanceCurrent ratio is the primary measure of a company's liquidity. Minimum levels of current ratio are often defined in loan covenants to protect the interest of the lenders in the event of deteriorating financial position of the borrowers. Financial regulations of various countries also impose restrictions on financial institutions to lend credit facilities to potential borrowers that have a current ratio which is lower than the defined limits.

Current Ratiohttp://www.myaccountingcourse.com/financial-ratios/current-ratioThe current ratio is aliquidityandefficiency ratiothat measures a firm's ability to pay off its short-term liabilities with its current assets. The current ratio is an important measure of liquidity because short-term liabilities are due within the next year.This means that a company has a limited amount of time in order to raise the funds to pay for these liabilities. Current assets like cash, cash equivalents, and marketable securities can easily be converted into cash in the short term. This means that companies with larger amounts of current assets will more easily be able to pay off current liabilities when they become due without having to sell off long-term, revenue generating assets.GAAPrequires that companies separate current and long-term assets and liabilities on thebalance sheet. This split allows investors and creditors to calculate important ratios like the current ratio. On U.S. financial statements, current accounts are always reported before long-term accounts.AnalysisThe current ratio helps investors and creditors understand the liquidity of a company and how easily that company will be able to pay off its current liabilities. This ratio expresses a firm's current debt in terms of current assets. So a current ratio of 4 would mean that the company has 4 times more current assets than current liabilities.A higher current ratio is always more favorable than a lower current ratio because it shows the company can more easily make current debt payments.If a company has to sell of fixed assets to pay for its current liabilities, this usually means the company isn't making enough from operations to support activities. In other words, the company is losing money. Sometimes this is the result of poor collections of accounts receivable.The current ratio also sheds light on the overall debt burden of the company. If a company is weighted down with a current debt, its cash flow will suffer.ExampleCharlie's Skate Shop sells ice-skating equipment to local hockey teams. Charlie is applying for loans to help fund his dream of building an indoor skate rink. Charlie's bank asks for his balance sheet so they can analysis his current debt levels. According to Charlie's balance sheet he reported $100,000 of current liabilities and only $25,000 of current assets. Charlie's current ratio would be calculated like this:

As you can see, Charlie only has enough currentassetsto pay off 25 percent of his current liabilities. This shows that Charlie is highly leveraged and highly risky. Banks would prefer a current ratio of at least 1 or 2, so that all the current liabilities would be covered by the current assets. Since Charlie's ratio is so low, it is unlikely that he will get approved for his loan.

What is the current ratio?http://www.accountingcoach.com/blog/current-ratio-2The current ratio is a financial ratio that shows the proportion ofcurrent assetstocurrent liabilities. The current ratio is used as an indicator of a company'sliquidity. In other words, a large amount of current assets in relationship to a small amount of current liabilities provides some assurance that the obligations coming due will be paid.If a company's current assets amount to $600,000 and its current liabilities are $200,000 the current ratio is 3:1. If the current assets are $600,000 and the current liabilities are $500,000 the current ratio is 1.2:1. Obviously a larger current ratio is better than a smaller ratio. Some people feel that a current ratio that is less than 1:1 indicates insolvency.It is wise to compare a company's current ratio to that of other companies in the same industry. You are also wise to look at the trend of the current ratio for a given company over time. Is the current ratio improving over time, or is it deteriorating?The composition of the current assets is also an important factor. If the current assets are predominantly in cash,marketable securities, and collectibleaccounts receivable, that is more comforting than having the majority of the current assets in slow-moving inventory.

current ratiohttp://www.investorwords.com/1258/current_ratio.htmlDefinitionAn indication of acompany'sability tomeetshort-term debtobligations; the higher theratio, the moreliquidthe company is. Current ratio is equal tocurrent assetsdivided bycurrent liabilities. If the current assets of a company are more than twice the current liabilities, then that company is generally considered to have goodshort-termfinancialstrength. If current liabilitiesexceedcurrent assets, then the company may have problems meeting its short-term obligations.For example, if XYZ Company'stotal current assetsare $10,000,000, and itstotal current liabilitiesare $8,000,000, then its current ratio would be $10,000,000 divided by $8,000,000, which is equal to 1.25. XYZ Company would be in relatively good short-term financialstanding.

Also see:List of Important Financial Ratios for Stock Analysisat InvestorGuide.com.

Current Ratiohttp://www.readyratios.com/reference/liquidity/current_ratio.htmlDefinitionThe current ratiois balance-sheet financial performance measure of company liquidity.The current ratio indicates a company's ability to meet short-term debt obligations. The current ratio measures whether or not a firm has enough resources to pay its debts over the next 12 months. Potential creditors use this ratio in determining whether or not to make short-term loans. The current ratio can also give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. The current ratio is also known as theworking capital ratio.Norms and LimitsThe higher the ratio, the more liquid the company is. Commonly acceptable current ratio is 2; it's a comfortable financial position for most enterprises. Acceptable current ratios vary from industry to industry. For most industrial companies, 1.5 may be an acceptable current ratio.Low values for the current ratio (values less than 1) indicate that a firm may have difficulty meeting current obligations. However, an investor should also take note of a company's operating cash flow in order to get a better sense of its liquidity. A low current ratio can often be supported by a strong operating cash flow.If the current ratio is too high (much more than 2), then the company may not be using its current assets or its short-term financing facilities efficiently. This may also indicate problems in working capital management.All other things being equal, creditors consider a high current ratio to be better than a low current ratio, because a high current ratio means that the company is more likely to meet its liabilities which are due over the next 12 months.Exact Formula in the ReadyRatios Analytic SoftwareCurrent ratio = F1[CurrentAssets]/F1[CurrentLiabilities]F1 Statement of financial position (IFRS).

The Current Ratiohttp://www.accountingtools.com/current-ratio

The current ratio measures the ability of an organization to pay its bills in the near-term. The ratio is used by analysts to determine whether they should invest in or lend money to an entity.For example, a supplier wants to learn about the financial condition of Lowry Locomotion. The supplier calculates the current ratio of Lowry for the past three years:Year 1Year 2Year 3

Current assets$8,000,000$16,400,000$23,400,000

Current liabilities$4,000,000$9,650,000 $18,000,000

Current ratio2:11.7:11.3:1

The sudden rise in current assets over the past two years indicates that Lowry has undergone a rapid expansion of its operations. Of particular concern is the increase in accounts payable in Year 3, which indicates a rapidly deteriorating ability to pay suppliers. Based on this information, the supplier elects to restrict the extension of credit to Lowry.Since the ratio is current assets divided by current liabilities, the ratio essentially implies that current liabilities can be liquidated to pay for current liabilities. A current ratio of 2:1 is preferred, with a lower proportion indicating a reduced ability to pay in a timely manner.The current ratio can yield misleading results under the following circumstances: Inventory component. When the current assets figure includes a large proportion of inventory assets, since these assets can be difficult to liquidate. This can be a particular problem if management is using aggressive accounting techniques to apply an unusually large amount of overhead costs to inventory, which further inflates the recorded amount of inventory. Paying from debt. When a company is drawing upon its line of credit to pay bills as they come due, which means that the cash balance is near zero. In this case, the current ratio could be fairly low, and yet the presence of a line of credit still allows the business to pay in a timely manner. In this situation, the organization should make its creditors aware of the size of the unused portion of the line of credit, which can be used to pay bills.

Limitations of the Current Ratio Analysishttp://www.currentratioformula.com/2012/05/limitations-of-current-ratio-analysis.htmlOne of the major limitations of the current ratio is that it does not focus on the quality of the current assets. For this reason this also called as the crude ratio. It does not gives the accurate and more precise idea of firms liquidity or financial position as a firm may be in trouble because of the more stock and operations that can not be converted in cash in a small period of time. Valuation of the current assets is also an issue in calculating the current ratio as the figure of the current ratio can be easily manipulated by overvaluing the current assets of the firm.

Another drawback of current ratio is that it does not tell anything about the profitability of the company. It does not indicate whether the production cost is high and it may result in incurring a loss to the company. Its also not tells about the sale price that whether it is low or not.

The formula of the current ratio is not applicable to the seasonal products and hence does not give a clear idea of the product performance throughout the year. Another limitation of the current ratio is that it is calculated on the figures of current assets and liabilities taken from the balance sheet. There is a continuous threat that these figures may be out dated and will not calculate the current ratio accurately regarding a specific time period. Different businesses and industries interpret current ratio in different ways such as higher the current ratio means the firm has high amount of cash in hand and it has problem in investing the capital which is taken as a negative point of the company. On the other hand low current ratio means that company is at high risk of liquidity and is unable to fulfill its financial obligation which again is considered to be the negative point of the company.

Advantages and Disadvantages of Current Ratiohttp://www.efinancemanagement.com/financial-analysis/advantages-and-disadvantages-of-current-ratioCurrent ratiois one of the most useful ratios in financial analysis as it helps to gauge the liquidity position of the business.In simple words, it shows a companys ability to convert its assets into cash to pay off its short-term liabilities. The article discusses different advantages and disadvantages of current ratio.It is calculated as a ratio of a companys current assets to its current liabilities. Current ratio is widely used by banks and financial institutions while sanctioning loans to the companies and therefore this is a vital ratio for any company. There are different ways ofanalysing and improving current ratioto portray a better liquidity position of a company.Along with knowing how to analyse and improve current ratio, it is important to know the advantages and disadvantages of using current ratioAdvantages of Current Ratio: Current ratio helps in understanding how cash rich a company is. It helps us gauge the short-term financial strength of a company. Higher the ratio, more stable the company is. Lower the ratio, greater is the risk of liquidity associated with the company. Current ratio gives an idea of a companys operating cycle. It helps in understanding how efficient the company is in selling off its products; that is, how quickly is the company able to convert its inventory or current assets into cash. Knowing this, company can optimize its production. This enables the company to plan inventory storage mechanisms and optimize the overhead costs. Current ratio as shows the managements efficiency in meeting the creditors demands. It gives an understanding ofworking capital management / requirementof the company.Disadvantages of Current Ratio: Using this ratio on a standalone basis may not be sufficient to analyse the liquidity position of the company as it relies on the quantity of current assets instead of quality of the asset. Current ratio includes inventory in the calculation, which may lead to overestimation of the liquidity position in many cases. In companies, where higher inventory exists due to less sales or obsolete nature of the product; taking inventory under calculation may lead to displaying incorrect liquidity health of the company. In companies where sales are seasonal; current ratio may show lower numbers in some months and higher current ratio in the other. Current Ratio may be impacted due to change in inventory valuation methodology by the company. Such will not be a case while using theAcid test ratiosince it does not consider inventory at all. An equal increase or decrease in the current assets and current liabilities can change the ratio. Hence an overdraft against inventory can cause current ratio to change. Hence it is very easy to manipulate current ratio.Conclusion:Current ratio is a very good indicator of liquidity position of the company amid certain limitations which one needs to keep in mind before using and interpreting the ratio. One can look to use Acid test ratio that does away with some limitations of current ratio; however any of these ratios need to be used in comparison/conjunction with other measures to interpret the short-term solvency of the company.

How to analyze and improve Current Ratio?http://www.efinancemanagement.com/financial-analysis/how-to-analyze-and-improve-current-ratioCurrent ratio is a critical liquidity ratio utilized extensively by banks and other financing institutions while extending loans to the businesses. How to improve current ratio? is a very common question which keeps hitting the entrepreneurs mind every now and then. For improving current ratio, the management needs to focus on various strategies including its current liabilities and assets which is not a onetime activity. It has to be monitored throughout the year.Current ratio is a figure resulted from dividing current assets by current liabilities of a firm. This figure is important because it measures the liquidity stand of a firm. Normally, it is assumed that higher the ratio, higher is the liquidity and vice versa. It would be unfair if the liquidity is concluded just on the basis of the ratio. Without going further to know what is making that ratio, it is difficult to form an opinion over it. It can be well explained with following situations:1. Normally,a dipping salewould increase the level of inventories. Claims of creditors cannot be settled with inventory, it would require hard cash. Undoubtedly, the ratio in this case is increasing but without improving the liquidity.2. Secondly,delayed payments by customerswill lead to increase the debtors level and eventually the current assets and therefore the current ratio. Here also, we can see the increase in the current ratio but decline in the real level of liquidity.3. Sell-off Unproductive Assets:Cash level can be increased by selling unused fixed assets. Otherwise the money is unnecessarily blocked into them and idle money accrues interest cost.4. Improve Current Asset by Rising Shareholders Funds:When the current assets are financed by equity rather than the creditors, the level of current assets would increase with current liabilities remaining the same. Consequently, this exercise will improve the current ratio. Taking the improvement of current ratio into view, drawings are not advisable. It is because drawings would reduce capital invested in the current assets and therefore the level of current liabilities will increase to finance the current asset. All this directs impacts the current ratio. In essence, owners fund i.e. capital and reserves and surpluses should remain invested in the firm to balance the current ratio.5. Sweep Bank Accounts:First of all, the management of the firm should always try to cut down on hard cash levels and keep the money in bank accounts. Facility of sweeping should be availed in the bank accounts which almost every bank and financial institution is providing. Sweeping is a facility by which excess fund are transferred from current account to another account which fetches interest on that fund. At the same time, these funds are available to use when required.6. It can be well established with the above examples that a current ratio of 1:1 is not sufficient because all the current assets are not easily converted into cash. A cushion over and above 1 is always required. This cushion is technically called Margin of Safety. In other words, current assets over and above the current liabilities are the margin of safety. We need marginal current assets simply as all the current assets are easily liquidated to cash.How to improve the current ratio? Faster Conversion Cycle of Debtors or Accounts Receivables:Faster rolling of money via debtors will keep the current ratio in control. At least, the ratio will show a correct picture if the debtors are liquid. A constant follow up with the debtors can improve the collections from them. In the first dealing itself, the payment terms should be made clear and should negotiate credit period as low as possible. Pay off Current Liabilities:Not only does the current ratio depend on current assets, it is equally dependent on the current liability which is the denominator. They should be paid off as often and as early as possible. It would decrease the level of current liabilities and therefore improve the current ratio. Early payments to creditors can save interest cost and earn discount which will have direct impact to the profits of the firm.

What are the limitations of ratioanalysis?http://www.accountingtools.com/questions-and-answers/what-are-the-limitations-of-ratio-analysis.htmlRatio analysis can be used to compare information taken from the financial statements to gain a general understanding of the results, financial position, and cash flows of a business. This analysis is a useful tool, especially for an outsider such as a credit analyst, lender, or stock analyst. These people need to create a picture of the financial results and position of a business just from its financial statements.However, there are a number of limitations of ratio analysis that you should be aware of. They are: Historical. All of the information used in ratio analysis is derived from actual historical results. This does not mean that the same results will carry forward into the future. However, you can use ratio analysis onpro formainformation and compare it to historical results for consistency. Historical versus current cost. The information on the income statement is stated incurrent costs(or close to it), whereas some elements of the balance sheet may be stated athistorical cost(which could vary substantially from current costs). This disparity can result in unusual ratio results. Inflation. If the rate of inflation has changed in any of the periods under review, this can mean that the numbers are not comparable across periods. For example, if the inflation rate was 100% in one year, sales would appear to have doubled over the preceding year, when in fact sales did not change at all. Aggregation. The information in a financial statement line item that you are using for a ratio analysis may have been aggregated differently in the past, so that running the ratio analysis on a trend line does not compare the same information through the entire trend period. Operational changes. A company may change its underlying operational structure to such an extent that a ratio calculated several years ago and compared to the same ratio today would yield a misleading conclusion. For example, if you implemented aconstraint analysissystem, this might lead to a reduced investment in fixed assets, whereas a ratio analysis might conclude that the company is letting its fixed asset base become too old. Accounting policies. Different companies may have different policies for recording the same accounting transaction. This means that comparing the ratio results of different companies may be like comparing apples and oranges. For example, one company might useaccelerated depreciationwhile another company uses straight-line depreciation, or one company records a sale atgrosswhile the other company does so atnet. Business conditions. You need to place ratio analysis in the context of the general business environment. For example, 60 days of sales outstanding might be considered poor in a period of rapidly growing sales, but might be excellent during an economic contraction when customers are in severe financial condition and unable to pay their bills. Interpretation. It can be quite difficult to ascertain the reason for the results of a ratio. For example, acurrent ratioof 2:1 might appear to be excellent, until you realize that the company just sold a large amount of its stock to bolster its cash position. A more detailed analysis might reveal that the current ratio will only temporarily be at that level, and will probably decline in the near future. Company strategy. It can be dangerous to conduct a ratio analysis comparison between two firms that are pursuing different strategies. For example, one company may be following a low-cost strategy, and so is willing to accept a lowergross marginin exchange for more market share. Conversely, a company in the same industry is focusing on a high customer service strategy where its prices are higher and gross margins are higher, but it will never attain the revenue levels of the first company. Point in time. Some ratios extract information from the balance sheet. Be aware that the information on the balance sheet is only as of the last day of the reporting period. If there was an unusual spike or decline in the account balance on the last day of the reporting period, this can impact the outcome of the ratio analysis.In short, ratio analysis has a variety of limitations that can limit its usefulness. However, as long as you are aware of these problems and use alternative and supplemental methods to collect and interpret information, ratio analysis is still useful.