A company's balance sheet shows current assets of ¥60 billion, fixed assets of ¥90 billion, current liabilities of ¥40 billion, fixed liabilities of ¥50 billion and net assets of ¥60 billion (all of which is equity). Which is the correct combination of its current ratio and equity ratio?

Answer: B. Current ratio 150%, equity ratio 40%

The current ratio shows how many times current liabilities, payable within a year, are covered by current assets, which can be turned into cash within a year: 60 ÷ 40 = 150%. The larger it is, the greater the short-term ability to pay, and in general a value below 100% is considered a warning sign for cash management. The equity ratio is the share of total assets made up of equity, which need not be repaid; total assets are 60 + 90 = ¥150 billion, so 60 ÷ 150 = 40%.

• A. This calculates the current ratio the wrong way round, as current liabilities ÷ current assets.
• B. Correct. Current assets ÷ current liabilities = 150%, and equity ÷ total assets = 40%.
• C. This calculates the equity ratio as equity ÷ liabilities (40 + 50 = ¥90 billion). The denominator should be total assets (liabilities + net assets).