The Importance Of Current Ratio

Current ratio is an efficient tool to measure that the organization is capable in meeting up its short term debts or not. Current ratio basically assesses a firm’s liquidity because, if a firm is enough liquid and it has enough resources then it can pay back the all debts that need to cover during 12 months.
Current Ratio = Current Assets ⁄ Current Liabilities
Higher current ratio definitely indicates that the firm is highly liquid and able enough to meet the demands of the creditors. Satisfactory current ratio actually varies from industry to industry but in general, if the current ratio lies between 1.5 and 3 then it indicates that the business is healthy. If the current ratio is below 1 then it means that the current liabilities are higher

If the ratio is lower, the leverage of the firm is also lower. It presents the parentage of a company’s asset that is financed by debt versus equity. It is a widespread quantity of the long term capability of a firm’s business and along with current ratio, a measure of its liquidity, or its ability to cover its expenses. So, it often takes only long term debts instead of total liabilities.
Sometimes, it happens that higher debt leads the firm to gain higher debt as cost of debt is lower than the cost of equity but it is not good for the firm to always apply this technique because if the firm fails to meet up the obligations of debts ten the firm can reach even in the stage of the bankruptcy. So, the firms should be much analytical and attentive when to take higher debts. Higher debt can lead to both higher gain and risk, so firms should be very careful while taking financial leverage.
Formula: Total Debt / Shareholder’s Equity Global India(Rs) Pakistan(Rs) Sri Lanka(Rs)
Year 2013 2012 2011 2013 2012 2013 2012 2013 2012
Total Debt 14690 18120 14319 11894.9 10501.9 25653.243 25246.024
Shareholders Equity 62575 61007 56797 23687.5 17984.1 11859.157 11560.264 4215.658