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CHAPTER FIVE: Liquidity Measurements > CURRENT LIABILITY RATIO

CURRENT LIABILITY RATIO

Description: The current liability ratio is used to determine the proportion of total liabilities that are due for payment in the near term. This is only an approximate measure of liquidity, since it does not indicate the ability of a company to pay its liabilities, or whether the liabilities are extensive or small. It is consequently most useful when tracked on a trend line to determine whether a company's proportion of current liabilities to total liabilities is worsening or improving over time.

Formula: Divide current liabilities by total liabilities. An alternative approach is to list in the numerator only those liabilities that are due for payment within a shorter time frame, such as the next month or quarter. This approach gives a better idea of the proportion of very short-term liabilities to all liabilities. The basic formula is:


  

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