The available resources to satisfy these obligations must come primarily from cash or the conversion to cash of other current assets. The current ratio is the overall barometer of working capital adequacy, usable primarily in comparison with the industry. It is important to recognize the limitations of using this ratio. The current ratio is a static measure based on the figures in the balance sheet at a particular date. It measures only the ability of current assets to meet current liabilities on that date.
Any excess is a liquid surplus available to meet imbalances in the flow of funds.
Usually, current assets are of a revolving nature since collected accounts receivables are replaced by new receivables, and the current liabilities are of a refunding nature, the repayment of one is followed by the creation of another. The amount and proportion of debt in a firm's capital structure is extremely important to the creditor because of the trade off between risk and return. Use of debt involves risk because debt carries a fixed commitment in the form of interest charges and principal repayment. Failure to satisfy the fixed charges associated with debt will result in bankruptcy. This ratio is the classic measure of leverage, and is calculated by dividing the total liabilities of the firm by the tangible net worth.