Current Ratio Formula

The current ratio can be expressed in any of the following three ways, but the most popular approach is to express it as a number. Hence, Company Y’s ability to meet its current obligations can in no way be considered worse than X’s. xero spruces up starter plan to help support small businesses is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site.

  1. A company with a high current ratio has no short-term liquidity concerns, but its investors may complain that it is hoarding cash rather than paying dividends or reinvesting the money in the business.
  2. Current ratio can give you an understanding of a company’s financial strength without having to go into too much detail.
  3. For instance, while the current ratio takes into account all of a company’s current assets and liabilities, it doesn’t account for customer and supplier credit terms, or operating cash flows.
  4. Generally, the assumption is made that the higher the current ratio, the better the creditors’ position due to the higher probability that debts will be paid when due.
  5. The best long-term investments manage their cash effectively, meaning they keep the right amount of cash on hand for the needs of the business.
  6. Since companies usually sell inventory for more than it costs to acquire, that can impact the overall ratio.

Current vs. quick ratio

These examples demonstrate how the current ratio is calculated and interpreted. It’s important to consider other financial ratios, industry standards, and the company’s performance over time to make a comprehensive assessment of its financial health. A low current ratio (generally below 1) suggests that the company does not have enough current assets to cover its short-term liabilities. This could be a sign of liquidity problems, implying that the company may struggle to pay off its debts. The current ratio is a liquidity ratio, a type of financial metric that provides insights into a company’s ability to pay off its short-term liabilities with its short-term assets.

How Is the Current Ratio Calculated?

Formula and Calculation for the Current Ratio

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