Current ratio
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Financial ratio analysis - liquidity ratios.
Current assets / Current liabilities.
The current ratio gives a very rough indication of the liquidity (or solvency) of the reporting entity.
If the current ratio were to fall below 1.0, this would indicate that the entity would not be able to meet its current liabilities out of its cash in hand and the proceeds of its other current assets.
Example
Current assets = £5m.
Current liabilities = £4m.
The current ratio is:
= 5 / 4
= 1.25.
