Current Ratio Calculator

Our current ratio calculator is a quick-to-use tool that allows you to analyze your company's liquidity. It uses the current ratio, also known as the working capital ratio, to measure if a company can repay its financial obligations.

This article will teach you the current ratio, how it is calculated, and how to interpret the results. We will also compare it with similar metrics to help you understand when you could apply the current ratio and when you should use alternative liquidity indicators. For example, the quick ratio, cash flow to debt, free cash flow, or defensive interval ratio.

What is the Current Ratio?

The Current Ratio is a financial liquidity metric that allows investors to assess the company's ability to repay its short-term liabilities. Short-term liabilities are all debts the company has to cover within one year. Therefore they are called current liabilities.

The metric measures the relation of the company's current assets to the current liabilities - the resulting number shows which of these figures is higher. 

• If the current ratio is lower than one, short-term debt exceeds the current assets, so the company might find it impossible to repay its debt on time. 
• If the current ratio is greater or equal to one, the company has enough assets to cover all its current liabilities.

The working capital ratio is another name for the current ratio indicator. 

How to calculate the current ratio?

The calculation of the current ratio is pretty straightforward. Not only is the formula very simple, but all the necessary variables you can easily find in the financial statement of the analyzed company.

Follow the procedure below to work out the current ratio value.

1. Find the value of the current assets in the company's financial statement.
2. Next, find the value of the current liabilities on the same document.
3. Substitute both values into our calculator or use the equation below to calculate the working capital ratio yourself.

The Current Ratio Formula

current_ratio = current_assets / current_liabilities

Where:

• current_assets - the subset of the company's assets that could be liquidated within one year. For example, inventory, cash and cash equivalents, etc. 
• current_liabilities - the company's debt must be paid off within one year. For example, short-term loans, salaries, etc.

What is a good current ratio?

The good current ratio value should be higher or equal to one, which means that the company can easily cover all its current liabilities.

Surprisingly, values significantly greater than one are not considered good because the company is not using its available assets efficiently, which could negatively affect its long-term growth rate and return on assets.

The value of the current ratio lower than one reveals that the company might have trouble repaying its current liabilities.

The importance of the current ratio.

The current ratio allows us quickly asses to company's financial health in terms of its liquidity. Therefore is widely used by investors as one of the gauges of a company's financial condition.

Here are some specific reasons why the current ratio is essential:

• It helps creditors and investors evaluate a company's ability to pay its debts on time.
• It measures a company's short-term liquidity, which can impact its ability to operate and grow.
• It can indicate the level of risk associated with a company's short-term obligations.
• It can reveal potential cash flow issues that may need to be addressed.
• It can be used to compare a company's financial health to industry benchmarks or competitors.
• It can help a company identify areas where it may need to improve its cash management or asset utilization.

What is the difference between the current ratio and the quick ratio?

First, the current ratio is easier to calculate since it uses all current assets to calculate its value. The quick ratio uses only liquid assets like cash and cash equivalent, marketable securities, and accounts receivable.

Second, the current ratio better represents the company's ability to meet its financial obligations since it considers more groups of assets.

Other tools metrics

In the long run, the company's liquidity depends on the company's profitability. The more profitable the company, the more resources it can accumulate, and therefore, it can easily cover its obligations.

Many tools on Calcopolis allow you to evaluate the company's profitability. Among the most popular ones are the EBIT calculator, Return on Equity calculator, or Earnings per Share calculator.

Authors

Created by Lucas Krysiak on 2022-10-20 11:32:44 | Last review by Mike Kozminsky on 2022-10-20 14:30:04