A current ratio calculator is a straightforward tool for calculating the current ratio, which we use to assess a company’s liquidity. Note that the current ratio sometimes refer to as the working capital ratio, so don’t be fooled by the varied names! We shall explain what a current ratio is in the paragraph below.

What is a current ratio?

The current ratio is a liquidity ratio that assesses a company’s capacity to pay short-term or one-year commitments. It explains to investors and analysts how a firm might use current assets on its balance sheet to pay down current debt and other obligations.

A current ratio of equal to or slightly greater than the industry average is typically seen as appropriate. Conversely, a lower current ratio than the industry norm might imply a higher risk of default or trouble. Similarly, if a company’s current ratio is unusually high relative to its peers, it suggests that management isn’t making the best use of its assets.

The current ratio is so named because it includes all current assets and liabilities, unlike some other liquidity ratios. The working capital ratio is another name for the current ratio.

The current ratio formula

Analysts determine the ratio by comparing a company’s current assets and liabilities. Cash, accounts receivable, inventory, and other current assets (OCA) that are projected to be liquidated or converted into cash in less than one year are reported as current assets on a company’s balance sheet. Accounts payable, wages, taxes payable, short-term loans, and the current part of long-term debt are all examples of current liabilities.

By dividing current assets by current liabilities, determine the current ratio. The general formula for the current ratio is as follows:

Current Ratio = current assets / current liabilities

How to calculate a current ratio with our calculator?

In the current ratio calculation, current assets are defined as anything your firm has that can be liquidated or transformed into cash within a year. As opposed to long-term assets like property or equipment, current assets include accounts receivable and inventory, as well as all of the cash your company already has.

If you’re not sure how to compute the current ratio, try following these steps:

  • First and foremost, you must examine the studied company’s financial statement.
  • Find the position “Current Assets” in the assets section of the balance sheet produced in line with the IFRS (International Financial Reporting Standards).
  • Then look for the position “Current Liabilities” in the section “Liabilities and Equity.”
  • Simply fill in the required fields in our calculator to acquire the current ratio’s value.
  • In the following portion of the article, we’ll go through how to understand the computed result.

Example of current ratio calculation

For the fiscal year ended 2017, the current ratios of three companies—Apple, Walt Disney, and Costco Wholesale—were estimated as follows:

COMPANYCURRENT ASSETSCURRENT LIABILITIESCURRENT RATIO
Apple Inc.$128.65 billion$100.81 billion128.65 / 100,81 = 1.28
Walt Disney Co.$15.89 billion$19.6 billion15.89 / 19.6 = 0.81
Costco Wholesale$17.32 billion$17.5 billion17.32 / 17.5 = 0.99

Costco Wholesale had 99 cents available to pay down every $1 of existing debt at the time this snapshot was recorded. Similarly, Walt Disney owned 81 cents in current assets for every dollar in current debt. Meanwhile, Apple has more than enough cash on hand to satisfy its present commitments if they were all due right away and its current assets could be converted to cash.

What is a good current ratio (working capital ratio)?

The value of the current ratio (working capital ratio) is straightforward to comprehend. It describes the relationship between a company’s current assets and current liabilities. To offer an example, a current ratio of 3 indicates that the company’s current assets exceed its current liabilities by 3 times.

People frequently believe that the greater the current ratio, the better. This is based on the basic premise that a greater current ratio indicates that the firm is more solvent and can more readily satisfy its commitments. However, you should be aware that a high current ratio is not necessarily a favourable thing for investors. An abnormally high current ratio may indicate that the firm is inefficiently using its current assets or is ignoring possibilities to get cash from external short-term finance sources.

A current ratio of less than 1.0 is often thought to signify insolvency. However, it is dependent on the circumstances. Even though the current ratio is less than one, the corporation may be able to pay its commitments in some cases. You should be aware that current allowable ratios differ by industry. As a result, it is usually good to compare the current ratio acquired to that of other organizations in the same industry. Furthermore, it is desirable to determine the present ratio’s trend. Over time, its falling value might be one of the earliest signs of financial difficulty for the organization (insolvency).

The current ratio vs. the quick ratio

Firstly, the current and quick ratios are both liquidity ratios that measure a company’s capacity to satisfy current debt commitments. We can calculate the current ratio using all current assets, also calculate the quick ratio using only quick assets or liquid assets.

The fast ratio, which is more conservative ratio, only examines assets that we convert to cash rapidly. In contrast, the current ratio also includes inventory, an asset that cannot be converted to cash in most situations within 90 days or less.

Current Ratio Changes Over Time

What makes the present ratio excellent or bad frequently relies on how it is evolving. For example, a firm that looks to have an adequate current ratio might be headed toward a position in which it will struggle to pay its expenses. Conversely, a firm that may appear to be failing presently might be making solid progress toward a stronger current ratio.

In the first example, the trajectory of the current ratio over time would be expected to hurt the company’s worth. Meanwhile, an increasing current ratio might signal a chance to invest in an inexpensive stock undergoing a turnaround.

Current Ratio vs. Other Liquidity Ratios

A current ratio study is supplement with other related liquidity measures. The distinctions in these measurements can assist an investor in comprehending the current state of the company’s assets and liabilities from various perspectives and how those accounts evolve over time in each situation.

The acid-test ratio, also known as the quick ratio, compares a company’s quickly liquidated assets (cash, accounts receivable, and short-term investments) to its current liabilities (excluding inventory and prepaid costs). The cash asset ratio (also known as the cash ratio) is similar to the current ratio in that it compares a company’s marketable securities and cash to its current liabilities.

Finally, the operational cash flow ratio compares a company’s current liabilities to its active cash flow from operating operations (CFO).

Limitations of Using the Current Ratio

One of the present ratio’s limitations becomes apparent when comparing different firms. Businesses fluctuate significantly among industries, therefore comparing current ratios across industries may not provide useful information.

For example, in one area, it may be more common to provide credit to clients for 90 days or more. But in another, short-term collections are more important. Ironically, the industry that provides more credit may have a larger current ratio on the surface since its current assets are higher. Comparing firms in the same sector is typically more beneficial.

Another disadvantage of employing the current ratio is its lack of specificity. It includes all of a company’s existing assets, even those that are difficult to liquidate, unlike many other liquidity ratios. For example, consider two firms that had a current ratio of 0.80 at the conclusion of the previous quarter. While this may appear to be the same on the surface, the quality and liquidity of those assets may be vastly different.

FAQ

Is a current ratio higher or lower better?

The greater the percentage, the more liquid the business. If all other factors are equal, creditors prefer a high current ratio over a low current ratio because a high current ratio indicates that the firm is more likely to satisfy its obligations due in the following 12 months.

Is a high current ratio good?

If your current ratio is low, you’ll have a hard time paying off your current obligations and liabilities. A current ratio of one or greater is generally regarded as acceptable, whereas anything less than one is the reason for concern.

What does the current ratio measure?

The current ratio is a liquidity ratio that assesses a company’s capacity to pay short-term or one-year commitments. It explains to investors and analysts how a firm might use current assets on its balance sheet to pay down current debt and other obligations.

What does a high current ratio mean?

The current ratio measures a company’s liquidity. Current ratios that are considered acceptable vary per sector. In many circumstances, a creditor may prefer a high current ratio versus a low current ratio because a high current ratio suggests that the firm is more likely to repay the creditor.

Is the current ratio a percentage?

Acceptable current ratios vary by sector, but they should be between 1.5 percent and 3 percent for healthy organizations. If a company’s current ratio is in this range, it usually means it has strong short-term financial health.

What Does a Current Ratio of 1.5 Mean?

A current ratio of 1.5 means that for every $1.00 in current obligations, the corporation has $1.50 in current assets. Consider a company’s existing assets, including $50,000 in cash and $100,000 in accounts receivable. It has $100,000 in accounts payable as current liabilities.