Current ratio and TOL/TNW calculator
Check the two ratios almost every credit note opens with: liquidity (current ratio) and leverage (TOL/TNW). Enter figures in ₹ lakh.
Liquidity and leverage
Current ratio = Current assets ÷ Current liabilities. TOL/TNW = Total outside liabilities ÷ Tangible net worth (net worth less intangible assets). Acceptable levels vary by bank, sector and loan type.
This calculator is for learning. Banks apply their own policies, margins and benchmarks, so treat the result as a guide, not a credit decision.
Why these two ratios matter
When a credit manager opens a borrower's balance sheet, two questions come first. Can the business meet its short-term obligations? And how much of the business is funded by outsiders compared with the owners? The current ratio answers the first. TOL/TNW answers the second.
How to use this calculator
- Enter current assets and current liabilities. Include working capital bank borrowings in current liabilities, as banks do.
- Enter total outside liabilities (TOL): everything the business owes to outsiders, including term loans, working capital borrowings, creditors and provisions.
- Enter tangible net worth (TNW): share capital plus reserves, less intangible assets such as goodwill and accumulated losses.
The formulas
- Current ratio = Current assets ÷ Current liabilities
- TOL/TNW = Total outside liabilities ÷ Tangible net worth
Worked example
Current assets of ₹300 lakh against current liabilities of ₹210 lakh give a current ratio of 1.43. Outside liabilities of ₹450 lakh against tangible net worth of ₹150 lakh give TOL/TNW of 3.00.
The business can meet its short-term obligations with a reasonable cushion, and for every ₹1 the owners have in the business, outsiders have put in ₹3.
What levels do banks look for?
- Current ratio: 1.33 is the level built into Tandon Method II, where the borrower funds at least a quarter of current assets from long-term sources. Many banks accept somewhat lower for certain sectors, but below 1.00 is a red flag.
- TOL/TNW: up to about 3:1 is commonly treated as comfortable, and some lenders accept up to 4:1 or more depending on the sector. Trading businesses often run higher leverage than manufacturers.
Benchmarks vary by bank, sector and loan type, so treat these as a guide.
Common mistakes
- Using book net worth instead of tangible net worth. Intangibles don't help repay a loan, so banks deduct them.
- Ignoring quasi-equity. Unsecured loans from promoters may be treated as part of net worth if they are subordinated to the bank's loan. Check the bank's policy.
- Looking at one year only. The trend over three years tells you more than a single balance sheet.
Frequently asked questions
Can the current ratio be too high? Yes. A very high current ratio can mean money is stuck in slow-moving stock or overdue receivables.
Is TOL/TNW the same as debt-equity ratio? No. Debt-equity usually counts only long-term debt. TOL/TNW counts all outside liabilities, so it is a broader measure of leverage.
For the full method behind sizing a working capital limit, try the MPBF calculator.
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