Current Ratio Calculator
Calculate a company’s current ratio to assess its short-term liquidity and ability to pay off short-term obligations. This financial metric compares current assets to current liabilities, helping investors and analysts evaluate a company’s financial health.
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Detailed Steps
Visual Representation
Formula
Current Ratio Definition
The current ratio is calculated by dividing the current assets by the current liabilities:
Interpretation
- Current Ratio > 1: The company has more current assets than current liabilities, suggesting good short-term financial health.
- Current Ratio = 1: The company has an equal amount of current assets and current liabilities.
- Current Ratio < 1: The company has more current liabilities than current assets, which may indicate potential liquidity problems.
A healthy current ratio is typically between 1.2 and 2.0, indicating the company has sufficient liquid assets to cover its short-term obligations.
How to Use the Current Ratio Calculator
- Enter the total current assets of the company in the first input field (e.g., $100,000).
- Enter the total current liabilities in the second input field (e.g., $50,000).
- Optionally, adjust the precision level for decimal calculations (default is 2).
- Choose your preferred display mode (Standard, Step by Step, or Chart).
- Click the “Calculate” button.
- View your results in your chosen display format, showing the current ratio and its interpretation.
Frequently Asked Questions (FAQs)
What is a current ratio?
The current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations (those due within one year) with its short-term assets. It compares a company’s current assets to its current liabilities and indicates whether a company has enough resources to meet its short-term financial obligations.
What is a good current ratio?
A healthy current ratio is typically between 1.2 and 2.0. A ratio above 1 indicates that the company has more current assets than current liabilities, which is generally a good sign. However, a ratio that’s too high (above 2.0) might suggest that the company is not efficiently using its assets to generate revenue. A ratio below 1 suggests potential liquidity problems.
What are current assets and current liabilities?
Current assets include cash, cash equivalents, short-term investments, accounts receivable, inventory, and other assets that can be converted to cash within one year. Current liabilities include short-term debt, accounts payable, accrued liabilities, and other obligations due within one year.
What are the limitations of the current ratio?
While the current ratio is useful, it has limitations: it doesn’t consider the timing of cash flows, it can be manipulated near reporting periods, and industry standards vary widely. A more stringent measure is the quick ratio (or acid-test ratio), which excludes inventory from current assets, focusing on assets that can be more quickly converted to cash.
How does the current ratio differ from the quick ratio?
The current ratio includes all current assets in its calculation, while the quick ratio (or acid-test ratio) excludes inventory, which is often the least liquid current asset. The quick ratio is a more conservative measure of liquidity because it only considers assets that can be quickly converted to cash.