current ratio
A company can use liquidity ratios to see if it is in a safe position to be able to pay its short-term debts – does it have enough cash to pay its bills? Current ratio and acid test ratio are two tests of liquidity.
The current ratio shows whether there are enough current assets to cover the current liabilities – whether the business is solvent. If creditors need paying quickly is there enough cash, or things that can be converted to cash, to pay them? The ideal current ratio is 2:1. This is how you work out the current ratio:
Current assets : Current liabilities
By dividing the current assets by the current liabilities you can convert the current ratio to a form that is easier to understand. For example, you can convert 8800:1000 to 8.8:1 (8800 ÷ 1000 = 8.8). This means that the business has £8.80 for every £1 it owes.
Your task
Use this formula to calculate Cadbury’s current ratio in 2005 and in 2006 in the space provided in the spreadsheet. Your answer will turn green if it is correct and red if it is not.
