The current ratio is the ratio of current assets to current liabilities. The current ratio of a firm measures its short-term solvency, that is, its ability to meet short-term obligations. As a measure of short term/current financial liquidity, it indicates the rupees of current assets available for each rupee of current liability/obligation.
The higher the current ratio, the larger is the amount of rupees available per rupee of current liability, the more is the firms ability to meet current obligations and greater is the safety of funds of short term creditors.
So, the increase in current ratio from 1 in 1999 to 2.5 in 2000 indicates good liquidity position of the firm. It indicates that firm has greater working capital to meet its day to day requirements. The firm can meet its short-term obligations effectively.
Increase in current ratio means increase in current assets, which may be either stock or cash or debtors. Increase in stock or any other current asset indicates good short-term solvency of the firm.
The standard current ratio is 1.33:1 and the firm’s current ratio has increased from 1 in 1999 to 2.5 in 2000. It indicates that the firm is improving its current ratio. The firm had current ratio of 1:1 i.e. for every one rupee of current liabilities current assets of one rupee are available to meet them. But the firm’s current ratio of 2.5:1 in the year 2000 indicates that for every one rupee of current liability, the firm has two and a half times current asset to meet them, which means more working capital.
This will improve short-term solvency of the firm. The increase in the current ratio may also due to decrease in current liabilities i.e. creditors, bills payable, etc.
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