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Current Ratio
What is current ratio? Current ratio is a type of liquidity ratio that measures a company’s ability to pay off its debts over the next 12 months period. It is usd to evaluate if the current liabilities such as accounts payable, salary payable can be paid off with its current assets. A ratio under 1 suggests that the company is unable to pay off its current liabilities with its current assets. A ratio of than 1 suggests that the company is able to pay off its short term liabilities with short term assets. Current ratio is similar to Acid test. Acid test doesn’t include inventory where current ratio does. Current ratio provides insight to a company’s performance. For example, if a company is slow in acquiring their Account Receivables or they have a low asset turnover, than the current ratio will be small.
Use the Current Ratio Calculator above to calculate the current ratio. However, the steps to calculating current ratio are below.
Step 1:
Find the total current assets such as cash, inventory, and accounts receivable.
Step 2:
Find the total current liabilities such as Accounts Payable, Salary Payable, and short term loan payment.
Step 3:
Divide the current assets by current liabilities.
Example:
A Company has Accounts Receivables of $50,000, inventory of $30,000, and cash of $45,000. The company also to pay $60,000 for accounts payable and $35,000 for employee salary. What is the company’s current ratio?
Step 1:
Find all current assets.
A/R = $50,000
Inventory = $30,000
Cash = $45,000
Total Current Assets =$50,000 + $30,000 + $45,00 = $125,000
Step 2:
Find all Current Liabilities.
A/P = $60,000
Employee Salary = $35,000
Total Liabilities Current Liabilities = $60,000 + $35,000 = $85,000
Step 3:
Divide the Current Assets by Current Liabilities
Current Ratio = $125,000/$85,000 = 1.31
Since the ratio is 1.31, this means that for every dollar that company owes, the company has 1.31 dollars.
Suggested Calculators
Quick Ratio – Use the calculator to calculate your quick ratio, print and turn in.
Debt Ratio – Calculate debt ratio. Use the template to automatically calculate your homework.
Debt to equity ratio – calculate debt to equity ratio. Use the template to do your homework.
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