About Current Ratio

What is Current Ratio?

The Current Ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables.

Formula for Current Ratio

The formula to calculate Current Ratio is:

\[\\text{Current Ratio} = \\frac{\\text{Current Assets}}{\\text{Current Liabilities}}\]

Where:

• Current Assets = Cash and cash equivalents + Marketable securities + Accounts receivable + Inventory + Prepaid expenses
• Current Liabilities = Short-term debt + Accounts payable + Accrued liabilities + Other current liabilities

Calculation Steps

1. Determine the total value of all current assets.
2. Determine the total amount of all current liabilities.
3. Divide the total current assets by the total current liabilities.

Example

Let's calculate the Current Ratio for a company with the following financial data:

• Current Assets: $100,000
• Current Liabilities: $50,000

1. Current Ratio = $100,000 / $50,000 = 2

Visual representation:

Therefore, the Current Ratio for this company is 2, meaning the company has $2 in current assets for every $1 in current liabilities. This suggests good short-term liquidity.