Current Ratio Calculator
The current ratio calculator is a simple tool that allows you to calculate the value of the current ratio, which is used to measure the liquidity of a company. Note that sometimes, the current ratio is also known as the working capital ratio, so don't be misled by the different names! In the text below, we will explain to you what is a current ratio.
In addition, this article should also help you answer the following questions:
- What is a current ratio formula?
- How to calculate a current ratio?
- What is a good current ratio?
Be sure also to visit the Sortino ratio calculator that indicates the return of an investment considering its risk.
What is a current ratio?
The current ratio is one of the most popular liquidity ratios. It measures a company's ability to cover its short-term obligations (liabilities that are due within a year) with current assets. To assess this ability, the current ratio compares the current total assets of a company to its current total liabilities.
Wait a minute, what are assets and liabilities?
Assets are all that a company owns. It can include patents, production equipment, inventories, etc. Liabilities are all that a company owes. It can be trade debts, workers' wages, taxes, and dividends. Companies have current and non-current assets/liabilities. The current ones mean they can become cash or be paid in less than a year, respectively.
The current ratio, therefore, is called "current" because, in contrast to other liquidity ratios, it incorporates all current assets (both liquid and illiquid) and liabilities.
The simple intuition that stands behind the current ratio is that the company's ability to fulfill its obligations depends on the value of its current assets.
The current ratio formula
The value of the current ratio is calculated by dividing current assets by current liabilities. More precisely, the general formula for the current ratio is:
current_ratio = current assets / current_liabilities
Note that the value of the current ratio is stated in numeric format, not in percentage points.
You can obtain the exact values of particular factors of this equation from the company's annual report (balance sheet).
How to calculate a current ratio with our calculator?
If you don't know how to calculate the current ratio, try to follow these instructions:
First of all, you have to check the financial statement of the analyzed company.
In the balance sheet prepared in accordance with the IFRS (), in the part concerning assets, find the position named “Current Assets.”
Then, in the “Liabilities and Equity” part, find the position “Current Liabilities.”
Fill in the appropriate fields in our calculator and simply obtain the value of the current ratio.
You can find out more about the interpretation of the calculated value in the next section of the article.
Example of current ratio calculation
Look at this example of current ratio calculation.
The owner of Mama's Burger Restaurant is applying for a loan to finance the extension of the facility. To estimate the credibility of Mama's Burger, the bank wants to analyze its current financial situation. One of the considered indicators is the current ratio.
The value of current assets in the restaurant's balance sheet is $40,000, and the current liabilities are $200,000.
It means that the current ratio is 0.2.
As it is significantly lower than the desirable level of 1.0 (see the paragraph What is a good current ratio?), it is unlikely that Mama's Burger will get the loan.
What is a good current ratio (working capital ratio)?
The interpretation of the value of the current ratio (working capital ratio) is quite simple.
It expresses the proportion of a company's current assets to its current liabilities. To give an example: a current ratio equal to 3 means that the company has 3 times more current assets than current liabilities.
Very often, people think that the higher the current ratio, the better. This is based on the simple reasoning that a higher current ratio means the company is more solvent and can meet its obligations more easily.
However, you have to know that a high value of the current ratio is not always good for investors. A disproportionately high current ratio may point out that the company uses its current assets inefficiently or doesn't use the opportunities to gain capital from external short-term financing sources. If so, we could expect a considerable drawdown in future earnings reports (check the maximum drawdown calculator for more details).
Generally, it is agreed that a current ratio of less than 1.0 may indicate insolvency. However, it depends on the particular situation. Sometimes, even though the current ratio is less than one, the company may still be able to meet its obligations. You have to know that acceptable current ratios vary from industry to industry.
So it is always wise to compare the obtained current ratio to that of other companies in the same branch of industry. Moreover, it is desirable to identify the trend of the current ratio. Its decreasing value over time may be one of the first signs of the company's financial troubles (insolvency).
The current ratio vs. the quick ratio
The current ratio may be confused with the quick ratio (acid ratio). We have covered the latter topic more in detail in the quick ratio calculator
Both of these indicators are applied to measure the company's liquidity, but they use different formulas. In the numerator, the current ratio takes into account all current assets while the numerator of the quick ratio considers only assets that are liquid (cash and cash equivalent, marketable securities, accounts receivable).
It is worth knowing that the current ratio is simpler to calculate, but sometimes it is less helpful than the quick ratio because it doesn't make a distinction between the liquidity of different types of assets.
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Besides, you should analyze the stock's Sortino ratio and verify if it has an acceptable risk/reward profile.
Finally, if stock picking is not for you, you could try investing in ETFs or in futures markets. Just be careful of margin calls.