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.

The classification decides several ratios at once, which makes the boundary interesting. Inventory that has not moved in three years is legally a current asset and economically is not. Receivables more than six months old are disclosed separately in Indian filings for exactly this reason.

Two entries inside the total deserve separate attention. Other current assets is a residual bucket that can hide advances to suppliers, balances with government authorities and deposits, 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 does not. Both are broken out in the notes.

Read the ageing schedule in the notes before treating the total as liquidity.

Not everything current is liquid.

The operating-cycle carve-out is the part that surprises people. Where a business takes longer than a year to turn raw material into cash, as construction, shipbuilding and heavy engineering do, inventory and receivables arising from that cycle are still classified as current even though they will not convert within twelve months. The 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.