About Current Ratio Calculator
Current ratio calculator is a simple tool for calculating the current ratio, which is used to measure the liquidity of a corporation. Take note that the current ratio is also known as the working capital ratio, so don’t be misled by the different titles! In the paragraph that follows, we will define a current ratio.
This page should also help you with the following questions:
- What is the current ratio calculation formula?
- What is the current ratio calculation formula?
- What constitutes a good current ratio?
What is the current ratio calculation formula?
The current ratio is one of the most commonly utilised liquidity ratios. It evaluates a company’s ability to cover short-term obligations (those due within a year) using current assets. To determine this capability, the current ratio compares a company’s current total assets to its current total liabilities.
What exactly are assets and liabilities?
All of a company’s possessions are its assets. Patents, manufacturing tools, stock, and other things might be included.
All of a company’s debts are considered its liabilities. Examples include trade debts, employee compensation, taxes, and dividends. Businesses have both current and non-current assets and liabilities. The current ones state that they can be paid sooner than a year or changed to cash.
Because it includes all current assets and liabilities, unlike other liquidity measures, the current ratio is named “current” (both liquid and illiquid).
The concept behind the current ratio is that a company’s ability to pay its debts is based on the value of its current assets.
What is the equation used to determine a current ratio?
The current ratio is calculated by dividing current assets by current liabilities. The following is a general formula for current ratio:
current ratio = current assets / current liabilities
The current ratio value is expressed in numbers rather than percentage points, which is important to note.
The company’s annual report contains the precise values of particular components in this equation (balance sheet).
What characteristics mark a healthy current ratio?
Try these steps if you’re unsure how to calculate current ratio:
You must first carefully review the financial statement of the company being studied.
Locate the position “Current Assets” in the IFRS-compliant balance sheet’s assets section (International Financial Reporting Standards).
Then, in the subsection “Liabilities and Equity,” check for the position “Current Liabilities.”
To obtain the current ratio’s value, just fill out the necessary fields in our calculator.
We’ll discuss how to comprehend the calculated value in the portion of the article that follows.
An illustration of calculating current ratio
Example of Current Ratio calculation
To aid in financing the facility’s growth, John Automobiles’ owner has asked for a loan. In order to determine John Automobiles’ validity, the bank wants to look into its current financial situation. One of the metrics being examined is the current ratio.
John Automobiles’ balance sheet lists $40,000 in current assets and $200,000 in current liabilities.
Therefore, the current ratio is 0.2.
Given that it is well below the ideal level of 1.0, John Automobiles is unlikely to obtain the loan.
Which current ratio is ideal?
It is simple to interpret the current ratio’s value (also known as the working capital ratio).
It explains the connection between current assets and current liabilities for a business. As an illustration, a current ratio of 3 means that the company’s current assets are 3 times greater than its current liabilities.
It’s a common misconception that the better the current ratio, the higher it should be. This is founded on the straightforward tenet that a higher current ratio demonstrates a company’s increased solvency and ability to easily meet its obligations.
A high current ratio is not necessarily a good thing for investors, though, so you should be mindful of that. A corporation may be using its current assets inefficiently or be neglecting opportunities to obtain funds from external short-term finance sources if its current ratio is very high.
Future earnings reports should significantly decline if this is the case.
Insolvency is generally considered to be present when the current ratio is less than 1.0. Nevertheless, it depends on the situation. In rare circumstances, the company may be able to pay its debts even if the current ratio is less than one. You should be aware that different industries have different permitted current ratios.
As a result, it is typically a good idea to contrast the present ratio obtained with that of other businesses in the same sector. Determining the present ratio’s trend is also desirable. One of the earliest indications that the organization is having financial problems could be its declining value over time (insolvency).
The quick ratio vs the current ratio
It’s conceivable that the fast ratio and current ratio can be used interchangeably (acid ratio).
Although their techniques differ, each of these metrics is used to evaluate a company’s liquidity. While the quick ratio just looks at liquid assets in the numerator, the current ratio takes into consideration all current assets (cash and cash equivalent, marketable securities, accounts receivable).
It’s important to remember that although the current ratio is simpler to calculate than the quick ratio, it often isn’t as relevant because it doesn’t distinguish between different types of assets’ liquidity.