Question

From the following information, calculate:

(i) Current ratio and
(ii) Debt to capital employed ratio

Information	Rs
Total Assets	6,00,000
Non-Current Liabilities	1,40,000
Shareholders' Funds	4,20,000
Non-current Assets	5,20,000

Hint:

Current assets = Rs. 6,00,000 - Rs. 5,20,000 = Rs. 80,000 and current liabilities = Rs. 40,000, so the current ratio is 2 : 1. Capital employed = Rs. 5,60,000 and debt = Rs. 1,40,000, so the ratio is 1 : 4.

Answer 1

Step 1: Recall the formulas:
Current Ratio = Current Assets / Current Liabilities.
Debt to Capital Employed Ratio = Debt / Capital Employed.
Total liabilities (shareholders funds + non-current liabilities + current liabilities) always equal total assets.

Step 2: Find Current Assets:
Current Assets = Total Assets - Non-Current Assets = Rs. 6,00,000 - Rs. 5,20,000 = Rs. 80,000.

Step 3: Find Current Liabilities:
Current Liabilities = Total Liabilities - Non-Current Liabilities - Shareholders Funds.
Total Liabilities = Total Assets = Rs. 6,00,000.
Current Liabilities = Rs. 6,00,000 - Rs. 1,40,000 - Rs. 4,20,000 = Rs. 40,000.

Step 4: Calculate (i) Current Ratio:
Current Ratio = Rs. 80,000 / Rs. 40,000 = 2 : 1.

Step 5: Find Debt and Capital Employed:
Debt = Non-Current Liabilities = Rs. 1,40,000.
Capital Employed = Shareholders Funds + Non-Current Liabilities = Rs. 4,20,000 + Rs. 1,40,000 = Rs. 5,60,000.

Step 6: Calculate (ii) Debt to Capital Employed Ratio:
Ratio = Rs. 1,40,000 / Rs. 5,60,000 = 1 : 4 or 0.25 : 1.

Step 7: Check by the alternate method:
Capital Employed = Non-Current Assets + Current Assets - Current Liabilities.
= Rs. 5,20,000 + Rs. 80,000 - Rs. 40,000 = Rs. 5,60,000. The figure is the same.

Final Answer:
(i) Current Ratio = 2 : 1.
(ii) Debt to Capital Employed Ratio = 1 : 4 or 0.25 : 1.