CR - Current Ratio is expressed by the ratio of total current assets and current liabilities.
Current ratio = Current assets / Current liabilities
Sometimes it is also called the solvency indicator (general business characteristic to raise funds to cover its obligations), or working capital ratio. It shows how many times current assets cover current liabilities of the enterprise, i.e. how many times the enterprise is able to satisfy the creditor, if it would convert all current assets into the cash at the given moment. The main purpose of this measurement is that the enterprise should pay its current liabilities from these components of assets that are identified to do so and not by selling, for example, tangible fixed assets.
The indicated optimum is between 1.8 and 2.5.The higher the value, the lower the risk of insolvency. It is a relatively rough indicator, which further depends on:
- Structure of current assets
- Liquidity of individual types of current assets
- Type of branch (market sector), in which the enterprise operates (in the low inventories branch, it will be optimal lower ratio. In branch with high inventories and longer maturities the ratio will be higher)
Another limitation of this ratio is that it does not take into account the structure of current liabilities in terms of maturity.