Financial Ratio Analysis - The Current Ratio

The Current Ratio

The current ratio is also known as the working capital ratio and is normally presented as a real ratio. That is, the working capital ratio looks like this:

Current Assets: Current Liabilities = x: y eg 1.75: 1

The Carphone Warehouse is our business of choice, so here is the information to help us work out its current ratio.

Consolidated Balance Sheet 31 March 2001 25 March 2000
  £'000 £'000
Total Current Assets 315,528 171,160
Creditors: Amounts falling due within one year 222,348 173,820

As we saw in the brief review of accounts section with Tesco's financial statements, the phrase current liabilities is the same as Creditors: Amounts falling due within one year.

Here's the table to fill in. OK, so we've done this one for you!

Current Ratio For the Carphone Warehouse
31 March 2001 Current Assets: Current Liabilities 315,528: 222,348 1.42: 1
25 March 2000 Current Assets: Current Liabilities 171,160: 173,820 0.98: 1

Maths revision. How did we get 1.42: 1 for the year ended 31 March 2001? All we did was to divide the current assets by the current liabilities and that gives us:

current assets = 315,528 = 1.42
current liabilities 222,348

so we automatically know that our ratio is 1.42: 1

The same with the year before:

current assets = 171,160 = 0.98
current liabilities 173,820

so the ratio is 0.98: 1

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