What's the current ratio?
submitted by Ron2K

Kenny8

Current Ratio = Current Assets / Current Liabilities

MamboJ

A company can use their current ratio to decide whether or not to get a loan. It helps you see if you can pay off your debt within a year.

Ideally, a 2:1 ratio is preferred.

Yubyub

It's a way to measure short-term liquidity. As a quick example, if a company has $50,000 in current assets and $35,000 in current liabilities, the current ratio would be 1.42. In other words, for every dollar you owe somebody else, you've got $1.42 of cash.

Wikket

The current ratio gives you a sense of the financial stability of a business. It gives you a rough idea of how close they are from bankruptcy.

If a company has a current ratio of 1, they're in bad shape. If all their debts came due at once, that means they would only have enough money to pay the debt and nothing leftover. Hence, the higher the current ratio, the better off they are. A high ratio would show the have plenty of resources to pay off their debt.

S.Crumb

Here's a shortcut:

Current Ratio Calculator

Just plug your numbers in there.

expensive breakfast

The current ratio give you a quick look at a company's liquidity, but it doesn't tell the whole story. For example, a really high current ratio might actually mean the company is holding too much cash or inventory that's not being used. That would actually suggest they're not running efficiently.

On the flip side, a really low current ratio could mean the company is struggling to meet its short-term obligations. However, that might also be a strategic choice if the company can quickly convert assets into cash, or if it has access to other sources of funding.

stewart

Different industries have different ideas of what makes a good current ratio. Retail businesses often operate with lower ratios because they turn over inventory quickly. Manufacturing, on the other hand, probably have higher ratios because of how they handle their assets and liabilities. So, while a 2:1 ratio is generally considered ideal, you'd need to consider what's average in your industry.

Current ratio only gives part of the story, so make sure that's not the only metric you're assessing. You can use other ratios, like quick ratio, debt-to-equity, or cash flow as well. That gives a more well-rounded picture of company health, since a business might have a good reason for having a less than ideal looking current ratio. If those other ratios are in order, you're less likely to scare off investors or lenders.