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Current Ratio Calculator

Measure of short-term liquidity.

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Current Ratio

Formula first

Overview

The Current Ratio is a fundamental liquidity metric that evaluates a company's ability to settle its short-term obligations with assets expected to be converted into cash within a single year. It serves as a primary indicator of financial health by comparing a firm's total current resources against its immediate liabilities.

Symbols

Variables

CR = Current Ratio, CA = Current Assets, CL = Current Liabilities

CR
Current Ratio
Variable
CA
Current Assets
£
CL
Current Liabilities
£

Apply it well

When To Use

When to use: This ratio is utilized during financial statement analysis to assess the short-term solvency of a business enterprise. It is most effective when comparing companies within the same industry or monitoring the liquidity trends of a single firm over multiple fiscal quarters.

Why it matters: Maintaining an adequate ratio ensures that a business can meet its payroll, pay suppliers, and service short-term debt without facing bankruptcy. While a ratio under 1.0 indicates potential liquidity issues, a ratio that is too high may suggest that the company is not utilizing its excess cash or inventory efficiently.

Avoid these traps

Common Mistakes

  • Including long-term assets or liabilities.
  • Convert units and scales before substituting, especially when the inputs mix £.
  • Interpret the answer with its unit and context; a percentage, rate, ratio, and physical quantity do not mean the same thing.

One free problem

Practice Problem

A retail corporation reports total current assets of 500,000 dollars and total current liabilities of 200,000 dollars. What is the current ratio for this period?

Current Assets500000 £
Current Liabilities200000 £

Solve for: CR

Hint: Divide the total current assets by the total current liabilities to find the ratio.

The full worked solution stays in the interactive walkthrough.

References

Sources

  1. Financial Accounting
  2. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (latest edition). *Financial Accounting: Tools for Business Decision Making*
  3. Ross, S. A., Westerfield, R. W., & Jaffe, J. F. (latest edition). *Corporate Finance*
  4. Ross, Stephen A., Westerfield, Randolph W., and Jaffe, Jeffrey F. Corporate Finance. McGraw-Hill Education.
  5. Weygandt, Jerry J., Kimmel, Paul D., and Kieso, Donald E. Financial Accounting. John Wiley & Sons.
  6. AQA A-level Business Specification