What Is the Current Ratio?
The current ratio measures whether a company can cover its short-term obligations from its short-term assets — a core liquidity ratio in FR interpretation. Here's how to use it.
The current ratio is a liquidity measure calculated as current assets divided by current liabilities. It shows whether a company has enough short-term assets to meet its short-term obligations as they fall due.
How to interpret it
A ratio of, say, 1.5:1 means the company has £1.50 of current assets for every £1 of current liabilities. A ratio comfortably above 1 suggests short-term obligations are covered, but very high ratios can signal inefficiency — too much cash, inventory or receivables tied up unproductively.
The current ratio vs the quick ratio
- The current ratio includes all current assets, including inventory.
- The quick (acid-test) ratio strips out inventory, because inventory can be slow to convert to cash.
- Comparing the two tells you how dependent liquidity is on selling inventory.
Using it well in the exam
Don't just quote the number. Explain the movement using the scenario — a new loan, a build-up of inventory, a change in payment terms — and comment on what it means for the business. A ratio in isolation earns little; a ratio explained earns the marks.
In FR interpretation questions, the marks are in the applied commentary. Marking a full answer against the official ACCA scheme with The 50% Club shows you which of your points scored and which were just description.