Certified Public Accountant (CPA) specializing in financial statement analysis, liquidity management, and working capital efficiency.
The **Current Ratio Calculator** assesses a company’s ability to cover its short-term liabilities (current liabilities) with its short-term assets (current assets). Enter values for any three of the four core parameters (Current Assets, Current Liabilities, Current Ratio, or Quick Ratio) to solve for the missing one.
Current Ratio Calculator
Instructions: Enter values for any three of the four core parameters to solve for the missing one.
Liquidity Parameters
Current Ratio Formula
The Current Ratio ($CR$) is calculated by dividing Current Assets ($CA$) by Current Liabilities ($CL$).
Current Ratio ($CR$):
$$CR = \frac{CA}{CL}$$Quick Ratio (Acid-Test Ratio – $QR$):
$$QR = \frac{QA}{CL}$$ Formula Source: InvestopediaVariables Explained (P, F, V, Q – Parameters)
- $CA$ (Current Assets, $P$): Assets expected to be converted to cash within one year.
- $CL$ (Current Liabilities, $F$): Debts due to be paid within one year.
- $CR$ (Current Ratio, $V$): A measure of short-term debt coverage.
- $QA$ (Quick Assets, $Q$): Current Assets minus less-liquid assets like Inventory.
Related Liquidity Calculators
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- Operating Ratio Calculator
- Gross Profit Margin Calculator
- Debt-to-Equity Ratio Calculator
What is Current Ratio?
The **Current Ratio** is a solvency ratio that indicates a company’s capacity to pay off its short-term debts and liabilities with its current assets. It is one of the most frequently used measures of liquidity. The ratio is typically expressed as a multiple (e.g., 2.0), meaning the company has 2 dollars in current assets for every 1 dollar in current liabilities.
This ratio is crucial because it provides insight into a company’s working capital position. A ratio of 1.0 or greater generally means the company has more assets than debts maturing within the next year, implying a healthy financial position. However, a ratio that is too high might suggest that the company is inefficiently managing its assets (e.g., holding too much cash or too much inventory).
How to Calculate Current Ratio (Example)
A business reports Current Assets ($CA$) of \$200,000 and Current Liabilities ($CL$) of \$100,000. We solve for the Current Ratio ($CR$):
- Step 1: Identify Current Assets and Liabilities
$CA = \$200,000$ and $CL = \$100,000$.
- Step 2: Apply the Formula
$CR = CA / CL = \$200,000 / \$100,000 = \mathbf{2.0}$.
- Step 3: Interpretation
The Current Ratio is $\mathbf{2.0}$, meaning the company has 2 times the assets needed to cover its short-term debts. This is generally considered a strong liquidity position.
Frequently Asked Questions (FAQ)
While industry standards vary, a Current Ratio between 1.5 and 3.0 is often considered healthy. A ratio less than 1.0 suggests difficulty meeting short-term obligations, while a ratio above 3.0 might suggest inefficient use of capital.
The Quick Ratio ($QR$) is more stringent than the Current Ratio ($CR$) because it excludes inventory (and prepaid expenses) from current assets. It’s often called the ‘acid-test’ because it tests the ability to pay short-term debt using only the most liquid assets.
No. An excessively high ratio (e.g., 5.0) can indicate that the company is hoarding cash, has too much inventory, or is failing to invest capital efficiently, potentially hurting long-term profitability.
Lenders use the Current Ratio to determine if a borrower (especially a business) is financially stable enough to repay a short-term loan. A low ratio can make securing credit difficult.