Page 387 - F2 Integrated Workbook STUDENT 2019

Analysis of financial performance and position

Short term liquidity ratios

Current ratio

Current assets

–––––––––––––––––––––– = n:n

Current liabilities Expressed as a ratio

TUTOR GUIDANCE

 Healthy level typically considered as 2:1.
 If too low – may not be able to repay creditors, risk of being forced into
liquidation.

 If too high may suggest:
– obsolete inventory
– poor credit control

– poor cash management.

 Must consider industry averages when determining a healthy current ratios
e.g. retailers will have lower CR than manufacturers.

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