Current ratio and balance sheet

		Article-73
Current ratio is a measure of a company's ability to meet its short-term liabilities. This ratio is also known as "working capital ratio". It is a measure of general liquidity and is most widely used to make the analysis for short term financial position or liquidity of a firm. The current ratio is an excellent diagnostic tool to measure the ability of your business to pay its bills over the next 12 months. The two basic components of this ratio are current assets and current liabilities. It is calculated by dividing current assets by current liabilities
Current assets
Current assets include cash and those assets which can be easily converted into cash within a short period of time, generally, one year, such as: ·         marketable securities or readily realizable investments, ·         bills receivables ·         sundry debtors, (excluding bad debts or provisions) ·         inventories ·         work in progress, etc. Prepaid expenses should also be included in current assets because they represent payments made in advance which will not have to be paid in near future. It is easy to manipulate this ratio by increasing the work in progress or inventory. In most of the businesses, often the majority portion of current Assets goes to sundry debtor. So if in a business, cash transaction is more, then naturally the current assets will be less and resulting a current ratio, which is less than one. It does not mean that the company is not able to meet its liabilities. Hotel industry is an example.
Current liabilities
Current liabilities are those obligations which are payable within a short period of time, generally one year and include ·         outstanding expenses ·         bills payable ·         sundry creditors ·         accrued expenses ·         short term advances ·         income tax payable ·         dividend payable, etc.
Significance
This ratio is a general measure of liquidity of a firm and an index of financial stability. A ratio equal to or near 2: 1 is considered as a standard, normal, or satisfactory. A ratio 2:1 means for every one-rupee liability, there is a two-rupee asset two meet the liability. Hence, the company is capable to meet its liabilities. When the current ratio falls below one, shows the assets of the company is not sufficient to meet its liabilities. An increase in the current ratio represents improvement in the liquidity position of the firm while a decrease in the current ratio represents that there has been deterioration in the liquidity position of the firm. A low ratio does not necessarily mean the company is a risky creditor, especially restaurants, service sector business etc. This is because  in such industries, cash payment is standard, where typically have little or no accounts receivable.
A company has a current ratio of 3 or 4, means that the Company  has so much cash on hand. A high ratio could indicate that the company is sitting on too much cash, that it is owed a lot of money by its customers or that it needs to operate with huge amounts of inventory
If a firm's current assets include debtors, which are not recoverable, or stocks which are slow-moving or obsolete, the current ratio may be high but it does not represent a good liquidity position.
Limitations of Current Ratio:
1.	Even if the ratio is favourable current ratio does not mean the Company is in a safe position. More stock and work in process, are not easily convertible into cash, and, therefore firm may have less cash to pay off current liabilities.
2.	Current Ratio measures only the quantity and not the quality of the current assets.
3.	Valuation of current assets is another problem. This ratio can be very easily manipulated by overvaluing the current assets.