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 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?
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 which are due within a year) with current assets. To assess this ability, the current ratio compares current total assets of a company to its current total liabilities.
The current ratio 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 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 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 current ratio, try to follow this instruction:
First of all, you have to check the financial statement of the analyzed company.
In the balance sheet prepared in accordance with the IFRS (International Financial Reporting Standards), in the part concerning assets, find the position named “Current Assets.”
Then, in the part “Liabilities and Equity” find the position “Current Liabilities.”
Fill 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 a current ratio.
The value of current assets in Mama's Burger balance sheet is $40,000, and the amount of current liabilities is $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 rather 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 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.
Generally, it is agreed that a current ratio 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. It's decreasing value over time may be one of the first sign 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).
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 to know that 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.