Current Ratio

One of the most general and most frequently used of these ratios is the current ratio.

Current ratio = Current assets
Current liabilities
$24,000,000 = 2.40 times
$10,000,000

industry average = 2.02 times

For 1993 Jimco's current assets were 2.40 larger than its current liabilities.

The higher the ratio, supposedly, the greater the ability of the firm to pay its bills. However, the ratio must be regarded as a crude measure of liquidity because it does not take into account the liquidity of the individual components of the current assets.

Quick (acid-test) Ratio

The acid-test ratio is similar to the current ratio except that it excludes inventory. It is calculated as follows:

Quick ratio = (Current assets - inventories)
Current liabilities

For Jimco, this ratio is

$11,700,000 = 1.17 times
$10,000,000

industry average = 0.61 times

A quick ratio of 1.0 or greater is occasionally recommended, but, as with the current ratio, an acceptable value depends largely on the industry. v


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Finance For Strategic Management
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