Current ratio is a comparison of current assets to current liabilities, calculated by dividing your current assets by your current liabilities.
Potential creditors use the current ratio to measure a company’s liquidity or ability to pay off short-term debts.
What is current ratio formula?
Formula. The current ratio is calculated by dividing current assets by current liabilities. This ratio is stated in numeric format rather than in decimal format. Here is the calculation: GAAP requires that companies separate current and long-term assets and liabilities on the balance sheet.
What does a current ratio of 1.2 mean?
Meaning. Current ratio measures the current assets of the company in comparison to its current liabilities. Hence if the current ratio is 1.2:1, then for every 1 dollar that the firm owes its creditors, it is owed 1.2 by its debtors.
How do you analyze current ratio?
Calculation of the Current Ratio
The current ratio shows how many times over the firm can pay its current debt obligations based on its current, most liquid assets. If a business firm has $200 in current assets and $100 in current liabilities, the calculation is $200/$100 = 2.00X.
What is a bad current ratio?
Low values for the current ratio (values less than 1) indicate that a firm may have difficulty meeting current obligations. If the current ratio is too high (much more than 2), then the company may not be using its current assets or its short-term financing facilities efficiently.
What is the ideal current ratio?
The ideal current ratio is 2: 1. It is a stark indication of the financial soundness of a business concern. When Current assets double the current liabilities, it is considered to be satisfactory. Higher value of current ratio indicates more liquid of the firm’s ability to pay its current obligation in time.
What is a safe current ratio?
Acceptable current ratios vary from industry to industry and are generally between 1.5% and 3% for healthy businesses. When a current ratio is low and current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations (current liabilities).
What happens if current ratio is too high?
The higher the ratio, the more liquid the company is. If the current ratio is too high (much more than 2), then the company may not be using its current assets or its short-term financing facilities efficiently. This may also indicate problems in working capital management.
What does a current ratio of 2.5 times represent?
Current ratio = Current assets/liabilities. For example, a company with total debt and other liabilities of £2 million and total assets of £5 million would have a current ratio of 2.5. This means its total assets would pay off its liabilities 2.5 times.