Current Liabilities To Net Worth Ratio - Formula - Example - Current Liabilities / Net Worth

What is Current Liabilities To Net Worth Ratio

This ratio shows the relationship between amounts due to the Accounts Payable and Equity of the business within the Current Accounting Period.aricle

In words, we can say that Current Liabilities Divided By Net Worth Multiplied By 100.

Mathematically, we can write the Formula of this ratio as: 

Current Liabilities / Net Worth x 100

  

This ratio shows in Percentage (%) measurement. 

  

Here Net Worth is calculated according to Accounting Equation and it is the Difference Between Total Assets - Total Current Liabilities within the Current Accounting Period.

  

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Importance of Current Liabilities To Net Worth Ratio 

1. The entrepreneurs use the resources provided by the Accounts Payable (Creditors) and Owners of the Business to finance various business projects.

2. If this ratio is greater than 50%, then it indicates that the business’s performance is decreasing day by day. If it is equal to 80% or more then, the business may need to shutdown. 

  

3. If this ratio is good, then it shows that the company can easily make their payment to Accounts Payable and Shareholders. 

How To Calculate Current Liabilities To Net Worth Ratio

Example: 

If the Current Liabilities for the Current Accounting Period is Rs. 60000 and Net Worth is Rs. 900000, then the ratio is 60000 / 900000 = 7%. Hence, the company can easily meet its amount due to Accounts Payable (Creditors) and Shareholders of the company. 

  

  

Finally, we can say that this ratio measures the solvency’s strength of the company. If this ratio is less than 50%, then it shows that the company is performing well day by day but it is more than 50% and increasing further on to 80% or 90%, then the business will fail at the end unless the company management takes necessary steps to avoid the disaster.