This KPI informs you whether the value of your Working Capital is enough to service your business. It's rather like the company's blood pressure test.
The calculation for Current ratio is conducted from the Balance Sheet and is simply Current Assets divided by Current Liabilities.
This example below is showing a Current ratio of 1.3:1, which means that for every R1 of Current Liability you have R1.30 in Current Assets.
We need this amount of cover because the nature of our business dictates that our stocks are always suffering the effects of depreciation and as an industry, we have the tendency to pay out money at a faster rate than we receive it.
Example:
A) Current Assets = R850,527 B) Current Liabilities = R654,251 C) Current Ratio = 1.3:1 (A ÷ B)
Discussion:
This KPI is also known as the Working Capital ratio and is one of the most important ratios to monitor to ensure that you have enough cash available on a day-to-day basis to enable your business to function properly.