How to Calculate Current Ratio

Current ratio (or working capital ratio) is a financial ratio that measures whether a firm has enough resources (liquid assets) to pay its debts (current liabilities) within one year. The ratio is calculated as follows:

Current ratio = Current Assets / Current Liabilities

Learn how to calculate current ratio with the following example:

Thomas Ltd has the following data as at 31 December 2010:
Trade creditors $50,000
Trade debtors $90,000
Bank overdraft $10,000
Proposed dividends $30,000
12% Debentures $120,000
Freehold buildings $250,000
Fixtures and fittings $35,000
Cash $100,000
Closing stocks $20,000
Calculate the working capital ratio.

Solution:
Current assets = Closing stock + Trade debtors + Cash = 20,000 + 90,000 + 100,000 = $210,000
Current liabilities = Trade creditors + Proposed dividends + Bank overdraft = 50,000 + 30,000 + 10,000 = $90,000
(Note: 12% Debentures are non-current liabilities; Freehold buildings and Fixtures & fittings are non-current assets)
Current ratio = 210,000 / 90,000 = 2.3
This means that the company can pay current liabilities 2.3 times over out of current assets.

* Next: How to Calculate Gross Profit Margin
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