Current asset

An asset expected to turn into cash within twelve months or within the operating cycle, whichever is longer. Cash, bank balances, trade receivables, inventory, short-term investments and prepaid expenses all sit here.

A distributor with ₹260 crore of cash, ₹640 crore of receivables, ₹780 crore of inventory and ₹95 crore of other current assets carries ₹1,775 crore of current assets.

Several ratios depend on this classification at once, so the boundary is worth watching. Inventory that hasn't moved in three years is legally a current asset and economically isn't. Receivables more than six months old are disclosed separately in Indian filings for this reason.

Two entries inside the total deserve separate attention. Other current assets is a residual bucket. It can hide advances to suppliers and balances with government authorities. Deposits end up there too, and a bucket growing faster than sales is worth opening. Short-term loans and advances is the other, particularly where the counterparty is a related entity, because money lent to a promoter company is presented as an asset that turns into cash within a year and frequently doesn't. Both are broken out in the notes.

Read the ageing schedule in the notes before you treat the total as liquidity.

Not everything current is liquid.

People are most often surprised by the operating-cycle carve-out. Construction, shipbuilding and heavy engineering take longer than a year to turn raw material into cash. Inventory and receivables arising from a cycle that long are still classified as current even though they won't convert within twelve months. That classification is correct under the standard and it makes the current ratio of a project business almost meaningless as a liquidity measure. For those companies, the maturity schedule of the borrowings and the expected billing schedule of the projects are the only useful reading.