Liquidity Ratios – Current Ratio
The standard test of liquidity is the current ration. It can be obtained from the balance sheet, and is calculated as follows.
Current ratio = Current assets / Current liabilities
The idea behind that is a company should have enough current assets that give a promise of “cash to come” to meet its future commitments to pay off its current liabilities. Obviously, a ratio in excess of 1 should be expected. Otherwise, there would be the prospect that the company might be unable to pay its debts on time. In practice, a ratio comfortably in excess of 1 should be expected, but what is “comfortable” various between different types of businesses.
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