Current ratio
Current assets over current liabilities. It counts inventory, which is the current asset least likely to turn into cash when it is needed.
Where you will meet it
Current ratio appears in 6 learning outcomes on the CFA syllabus. A few of them:
- Explain how assets and liabilities are split into current and non-current
“The classification drives the liquidity ratios, which makes the boundary cases consequential: debt maturing within a year is current unless a right or agreement to refinance it long term is already in place, and a breached covenant can make long-term debt immediately current and turn a comfortable current ratio into a deficit overnight.”
- Analyse the effects of the current rate and temporal methods on financial statements and ratios
“Under the current rate method every balance sheet item moves with the closing rate, so pure balance sheet ratios such as the current ratio and debt to assets keep their local currency values, and margins are preserved at the average rate.”
- Analyse how the choice of inventory method changes financial ratios
“The ratio consequences run in different directions and must be traced individually: inventory turnover appears higher under LIFO because the numerator is raised and the denominator lowered, while the current ratio and return on assets are depressed by the lower inventory and lower income.”
- Work out liquidity, solvency and activity ratios and explain what they mean
“Liquidity ratios ask whether short-term obligations can be met — the current ratio, and the quick ratio which strips out inventory as the least certain current asset.”
Practise it
Practise current ratio until it is automatic: questions that explain every wrong option.
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