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Current Ratio Calculator
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Date publish: 19.09.2024
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Author: Calcwizard
The Meaning of Current Ratio
The current ratio is a financial number existing to illustrate a business’ capacity to pay back its obligations using short term assets. A significant advantage, having a high current ratio nonetheless reflects position contrary to danger; similarly low ratios could indicate potential financial troubles for all parties concerned.
How to Calculate the Current Ratio
The formula for calculating the current ratio is:
Current Ratio = Current Assets / Current Liabilities
Example Calculation
| Current Assets | Current Liabilities | Current Ratio |
|---|---|---|
| $150,000 | $100,000 | 1.5 |
| $200,000 | $250,000 | 0.8 |
| $300,000 | $150,000 | 2.0 |
| $500,000 | $400,000 | 1.25 |
Some Interesting Information
- A current ratio of 1.0 means that the firm’s current assets equal its current liabilities.
- Different industries have different benchmarks for a healthy current ratio. For example, retailing companies might aim for ratios of 1.2 to 1.5.
- Though a high current ratio is generally beneficial, too high ratios may reflect inefficient use of resources.
- The current ratio does not allow for the quality or liquidity of current assets. For example, inventory may not be as easily convertible into cash like money in your savings account.
- An investor often compares the current ratio with the quick ratio to gain a more complete perspective on liquidity.
Conclusion
With the Current Ratio Calculator, we can better understand a company’s financial health. By grasping this figure, you can weigh alternatives to make more knowledgeable decisions concerning investments or business transactions at large.
