All worked examples use the accounts of Sahyadri Foods plc from Topic 10.1 (₹ million): revenue 800; cost of sales 480; gross profit 320; profit from operations 120; profit for the year 75; dividends 30; inventory 90 (opening inventory 70); trade receivables 110; cash 30; current assets 230; trade payables 100; current liabilities 120; non-current liabilities 200; share capital 300 (300 million shares); reserves 210; market share price ₹4.50. All sales are on credit; credit purchases were ₹500 million.
Liquidity matters because a business that cannot pay suppliers, wages or lenders on time may be forced into administration or liquidation (Topic 5.1) — even if it is profitable. Suppliers and lenders examine liquidity before giving credit.
Current ratio = current assets ÷ current liabilities = 230 ÷ 120 = 1.92 : 1
Acid test ratio = (current assets − inventory) ÷ current liabilities = (230 − 90) ÷ 120 = 140 ÷ 120 = 1.17 : 1
| Ratio | Interpretation |
|---|---|
| Current ratio | A result of roughly 1.5–2 : 1 is often considered comfortable. Sahyadri (1.92) can cover its short-term debts almost twice. Too low (below 1) signals possible difficulty paying debts; too high may mean too much cash tied up in inventory or receivables. |
| Acid test ratio | Excludes inventory, which may be hard to sell quickly. A result of about 1 : 1 is usually acceptable. Sahyadri (1.17) can pay its current liabilities without selling any inventory. Supermarkets often have low acid test ratios because they sell for cash and turn inventory over quickly. |