PART 5 : Current Ratio RATIO ANALYSIS

In this series we are covering stock $RIIL The Current Ratio is a financial ratio that shows whether a company has enough short-term assets to pay its short-term debts. It helps investors understand the company's short-term financial strength. Formula : Current Ratio = Current Assets ÷ Current Liabilities Current Assets: Cash, bank balance, accounts receivable, inventory, marketable securities, and prepaid expenses. Current Liabilities: Accounts payable, short-term loans, outstanding expenses, and the current portion of long-term debt. How to Understand the Current Ratio Current Ratio : Meaning Above 1.5 – 2.0 Good financial position. The company can comfortably pay its short-term liabilities. Around 1.0 Average liquidity. The company can meet its obligations, but there is little margin for safety. Below .0 Weak liquidity. The company may face difficulty paying its short-term debts. Note: The ideal current ratio varies from industry to industry. For example, utility companies often operate with a lower ratio, while retail businesses generally require a higher ratio. Advantages : Easy to calculate and understand. Gives a quick idea of a company's short-term financial health. Helps investors assess whether the company can pay its upcoming obligations. Limitations : It is based on the balance sheet at a single point in time and may not reflect the company's actual financial position throughout the year. It assumes all current assets can be converted into cash quickly, which may not always be true. Companies can temporarily improve the ratio before reporting their financial statements. It does not consider the timing of cash inflows and outflows. Example : Suppose a company has: Current Assets: ₹5,00,000 Current Liabilities: ₹2,50,000 Current Ratio = ₹5,00,000 ÷ ₹2,50,000 = 2.0 This means the company has ₹2 of current assets for every ₹1 of current liabilities which indicates a strong short-term financial position.