Current Ratio - reply to mukal India
Alpin McGregor, freeelance, United Kingdom, Member
Current assets are 1500 and current liabilities are 600. Current ratio is therefore 2.5 : 1.
How much can one borrow before the current ratio falls below 1.5 : 1? Answer 1200 so current assets 1500 + 1200 = 2700 and current liabilities 600 + 1200 = 1800 giving current ratio of 1.5 : 1.
This answer assumes that bank borrowing is all repayable within the next 12 months. If bank borrowing is repayable in a time period of more than 12 months then the current ratio will rise with each amount of borrowing. One must remember the assumption that these answers are based on. They assume that all other variables stay constant. This patently is not true.