Current ratio

What it means

A liquidity ratio calculated as current assets divided by current liabilities.

Example

Current assets of RM30,000 and current liabilities of RM15,000 give a current ratio of 2:1.

Why it matters

It helps judge short-term solvency. Explaining what the ratio means earns the analysis marks.

In practice

The current ratio is not an account. It is worked out from the statement of financial position by dividing total current assets by total current liabilities. It is written as a ratio such as 2:1. Both figures come straight from the current section of the statement.

Suppose current assets are RM60,000 and current liabilities are RM30,000. The current ratio is 2:1. The business holds two ringgit of short-term assets for every one ringgit of short-term debt.

A result comfortably above 1:1 suggests the business can meet its debts as they fall due. A very high figure may hint at idle cash or too much stock.

Students often confuse it with the acid test (quick) ratio. This ratio removes inventory from current assets, because stock is the slowest item to turn into cash. Using the same figures, if inventory were RM20,000, the quick ratio would be (60,000 - 20,000) divided by 30,000, which is 1.33:1. Comparing the two shows how much a business depends on selling stock to stay liquid.

If you can calculate the ratios but struggle to explain them, one of our teachers can help you write comments that earn the analysis marks. Book a trial class.

Related terms

• Working capital
• Current asset
• Current liability

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 6.2 Interpretation of accounting ratios (page 18).

Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.