Current Ratio

Current Ratio

Formula

$$\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}}$$

Explanation

• Measures the overall short-term safety margin.
• Shows how many ringgit of current assets exist for each RM1 of current liability.

Satisfactory level / rule of thumb

• Traditional rule of thumb: around 2 : 1 is often considered “comfortable”
• Too low: may have difficulty paying bills
• Too high: may mean too much money stuck in inventory or receivables

Industry norm

• Retailers with high stock often have higher current ratios
• Service firms (with low inventory) may operate safely with lower ratios.

Example

• Current assets = RM300,000
• Current liabilities = RM150,000

$$\text{Current ratio} = \frac{300,000}{150,000} = 2.0 : 1$$