# Learn How to Calculate Liquidity Current Ratio - Tutorial

## How to Calculate Liquidity Current Ratio - Definition, Formula and Example

#### Definition:

The ratio used to measure the ability of a company to pay its short-term liabilities with the short-term assets is called as the current or liquidity ratio. It is calculated by dividing the current assets with the current liabilities. The components of current ratio namely current assets and current liabilities are used to derive working capital which is the difference between current assets and current liabilities.

#### Formula:

Current Assets = a + b + c + d + e Current Liabilities = u + v + w Liquidity Current Ratio = Current Assets / Current Liabilities Where, a = Cash and Cash Equivalents b = Short-term Investments c = Net Receivables d = Inventory e = Other Current Assets u = Accounts Payable v = Short-term Debt w = Other Current Liabilities

#### Example:

Cash Equivalents is Rs 700, Net short-term investments is Rs 12000, Net receivables is Rs 15000. Inventory is Rs 1800, Other current assets is Rs 21000, Accounts payable is Rs 26000, Short-term debt is Rs 300, Other current liabilities is Rs 450. Find out liquidity current ratio from the given values?

##### Given,

Cash Equivalents = 700 Net short-term investments = 12000 Net receivables = 15000 Inventory = 1800 Other current assets = 21000 Accounts payable = 26000 Short-term debt = 300 Other current liabilities = 450

##### To Find,

Liquidity current ratio, we need to find current assets, current liabilities Current Assets = a + b + c + d + e Current Liabilities = u + v + w Liquidity Current Ratio = Current Assets / Current Liabilities

##### Solution:
Calculation for Current Assets

Current Assets = a + b + c + d + e Current Assets = 700 + 12000 + 15000 + 1800 + 21000 Current Assets = Rs. 50500 Calculation for Current Liabilities Current Liabilities = u + v + w Current Liabilities = 26000 + 300 + 450 = Rs. 26750 Calculation for Liquidity Current Ratio Liquidity Current Ratio = Current Assets / Current Liabilities Liquidity Current Ratio = 50500 / 26750 = Rs. 1.8879