Business Studies – 5.5.2 Liquidity | e-Consult

Current Ratio = Current Assets / Current Liabilities

Current Ratio = £40,000 / £25,000 = 1.6

A current ratio of 1.6 means that the business has £1.60 of current assets for every £1 of current liabilities. This suggests that the business has a reasonable ability to meet its short-term obligations. It indicates a healthy level of liquidity.

One potential problem associated with a very high current ratio is that it could indicate that the business is not using its assets efficiently. For example, it might be holding too much cash or inventory that is not being sold quickly. This ties up capital that could be used for more profitable investments.