Jane Foster is a Certified Financial Analyst (CFA) specializing in liquidity risk and working capital management for medium to large enterprises.
The **Current Ratio Calculator** measures a company’s ability to cover its short-term liabilities with its short-term assets. This is the primary metric for assessing liquidity. **Input any three of the four core variables** (Current Assets A, Current Liabilities L, Current Ratio R, or Working Capital W) to instantly solve for the missing one, giving you a complete liquidity picture.
Current Ratio Calculator
Current Ratio Core Formulas
The Current Ratio (R) is based on the relationship between Current Assets (A) and Current Liabilities (L). Working Capital (W) is the difference between them. This calculator uses all three relationships to solve for any missing variable:
Formula Source: Investopedia: Current Ratio
Variables Explained
These four variables are foundational to liquidity and short-term solvency analysis:
- Current Assets (A): Assets expected to be converted to cash within one year (e.g., cash, accounts receivable, inventory).
- Current Liabilities (L): Debts or obligations due within one year (e.g., accounts payable, short-term debt).
- Current Ratio (R): The result of $A / L$, measuring liquidity.
- Working Capital (W): The result of $A – L$, representing the capital available for daily operations.
Related Calculators
Explore these related tools to refine your liquidity and solvency analysis:
- Quick Ratio Calculator
- Cash Ratio Calculator
- Debt-to-Equity Ratio Calculator
- Inventory Turnover Calculator
What is the Current Ratio?
The **Current Ratio** is one of the most popular and important financial ratios used to evaluate a company’s liquidity. It gives investors and creditors an idea of the company’s ability to pay off its short-term debts with its short-term assets. The higher the ratio, the more capable the company is of covering its obligations.
A ratio of **2.0** (or 2:1) is generally considered healthy, meaning the company has twice as many current assets as current liabilities. A ratio below 1.0 (or 1:1) suggests the company may struggle to meet its immediate financial obligations. Conversely, a ratio that is too high (e.g., 5.0) might indicate inefficient use of assets, such as holding too much idle cash or excess inventory, which limits profitability.
How to Calculate Current Ratio (Example)
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Gather Variables:
A company reports **Current Assets (A)** of **\$1,500,000** and **Current Liabilities (L)** of **\$500,000**.
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Apply the Ratio Formula:
Divide Current Assets by Current Liabilities: $$ R = \frac{A}{L} = \frac{\$1,500,000}{\$500,000} $$
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Determine the Current Ratio:
The resulting Current Ratio is **3.0**. This indicates that the company has \$3.00 in liquid assets for every \$1.00 in short-term debt, suggesting excellent liquidity.
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Determine Working Capital:
Working Capital ($W$) is $A – L = \$1,500,000 – \$500,000 = \mathbf{\$1,000,000}$.
Frequently Asked Questions (FAQ)
A: The optimal ratio is generally between 1.5 and 3.0, but this is highly industry-dependent. A tech company might have a lower ratio than a manufacturing company because it relies less on large physical inventory.
A: The Quick Ratio (Acid-Test Ratio) is a stricter measure of liquidity because it excludes inventory and prepaid expenses from Current Assets, as these items are typically harder to liquidate quickly into cash.
A: The ratio decreases when a company takes on more short-term debt (L increases) or converts liquid assets into long-term assets (A decreases), such as using cash to buy equipment.
A: No, the ratio itself (A/L) cannot be negative since both Assets and Liabilities are non-negative, but Working Capital ($A-L$) can be negative if Liabilities exceed Assets.