Nexym
  • Business
  • Finance
  • Technology
  • Health
  • Life
  • More
    • Auto
    • Food
    • Health
    • Home
    • Space
    • Travel

Subscribe to Updates

Get the latest creative news from FooBar about art, design and business.

What's Hot
Are you looking to purchase a laptop in 2023? Please read our guide to help you decide which laptop fits you best.

The best laptops you can buy today

January 26, 2023

How to grow your hair faster and thicker

January 26, 2023
Find out how to use the best balance transfer credit cards to start reducing your debt in 2023. Compare offers and find the card that works for you.

The best balance transfer credit cards

January 26, 2023
Facebook Twitter Instagram
Nexym
  • Business
    Learn the skills you need to become a great content writer. From writing, editing, and researching to storytelling and creative thinking.

    Top skills you need to become a great content writer

    January 24, 2023

    How to see the bigger picture in business

    January 13, 2023
    What is a corporation? What does it mean to be incorporated? How do you start one? Read the definition of corporation, learn the different types of corporations and how to incorporate them.

    What is a corporation? Definition, meaning, types and more

    January 13, 2023
    Many people dream of creating a Starbucks coffee shop chain. Here are three alternatives for how to open a Starbucks franchise in your city.

    The best alternatives to opening a Starbucks franchise

    January 9, 2023
    Domino’s is giving you $3 not to use their delivery service. Find out how to get your hands on that cash.

    Interesting strategy – Domino’s pays you $3 if you don’t use the delivery

    January 5, 2023
  • Finance
    Find out how to use the best balance transfer credit cards to start reducing your debt in 2023. Compare offers and find the card that works for you.

    The best balance transfer credit cards

    January 26, 2023

    What is options trading? A quick guide and overview

    January 25, 2023
    What is Forex trading? Learn the basics of Forex, including how to trade currencies using technical indicators.

    What is forex trading? A complete guide

    January 22, 2023
    Learn what Ethereum is, how to buy it and how you can benefit from investing in this cryptocurrency.

    What is Ethereum? Everything you need to know about this cryptocurrency

    January 20, 2023
    Southwest Airlines Rapid Rewards rewards customers with points redeemable for flights, upgrades, and more. Learn more about it in this article!

    The complete guide to the Rapid Rewards program by Southwest Airlines

    January 19, 2023
  • Technology
    Are you looking to purchase a laptop in 2023? Please read our guide to help you decide which laptop fits you best.

    The best laptops you can buy today

    January 26, 2023
    If you are getting an error 500 Internal Server Error in WordPress, then you might want to check this post for a solution.

    How to fix the 500 internal server error in WordPress

    January 21, 2023
    You can upload files to your WordPress site with FTP, but there are many different tools that you could use for that purpose. This article will help you decide which tool is the best to use on your WordPress blog.

    The 4 best FTP clients for WordPress

    January 20, 2023
    Purchasing a guitar for the first time can be intimidating. This guide provides helpful tips on where to begin, including checking different types of guitars.

    Everything to know about getting your first guitar

    January 19, 2023

    What is the difference between WordPress.com and WordPress.org?

    January 17, 2023
  • Health
  • Life

    How to grow your hair faster and thicker

    January 26, 2023
    Teacher Appreciation Week is an excellent time to show teachers how much we appreciate them. Learn gift etiquette to get a meaningful and thoughtful gift.

    Teacher Appreciation Week gift ideas they will love

    January 24, 2023
    Learn what makes a Capricorn so driven and determined by reading this article. You'll discover their personality traits, which you can use to understand them better.

    Capricorn personality traits: how to understand them better

    January 24, 2023
    Learn how to remove acrylic nails in just minutes. Follow these steps and you’ll be able to remove acrylic nails with ease!

    How to remove acrylic nails: Fast and cheap!

    January 24, 2023
    Are you ready to test your knowledge of the holiday season? This is a fun quiz that features some tricky questions.

    Top 90 fun Christmas quiz questions | The best Christmas games

    January 20, 2023
  • More
    • Auto
    • Food
    • Health
    • Home
    • Space
    • Travel
Facebook Twitter Instagram
Trending
  • The best laptops you can buy today
  • How to grow your hair faster and thicker
  • The best balance transfer credit cards
  • Avoid these tourist traps and visit better locations
  • What is options trading? A quick guide and overview
  • Office or a gaming chair – what to look for when buying one
  • Teacher Appreciation Week gift ideas they will love
  • Top skills you need to become a great content writer
Nexym
Home»Finance»Current ratio: What it is and how to calculate it
Finance

Current ratio: What it is and how to calculate it

Eliott BertholdBy Eliott BertholdApril 1, 20225 Mins Read
Facebook Twitter LinkedIn Reddit Telegram WhatsApp Pinterest Email
Share
Facebook Twitter LinkedIn

What is the current ratio?

The current ratio is a liquidity ratio that measures a company’s ability to meet its short-term obligations. It is calculated by dividing the company’s current assets by its current liabilities.

A current ratio in line with the industry standard or slightly higher is considered acceptable. A lower than average current ratio may indicate distress or default risk and lower solvency ratios, which could make investment more worthwhile if there are significant assets on the balance sheet to use as collateral for loans.

A company’s current ratio is one of the most popular metric to assess liquidity. It must include all of a company’s existing assets and liabilities, not just the liquid assets and liabilities.

For example, a company with a current ratio of less than one may indicate liquidity problems that could cause it to go bankrupt. However, it still could secure other forms of financing if necessary.

Alternatively, a company with a high current ratio over 3 implies that it may not be using its existing assets as efficiently as possible. This could mean that the company is not managing its working capital properly.

How to calculate the current ratio

The current ratio measures a company's ability to pay its short-term liabilities with its short-term assets. Here's how to calculate it and what it means for your business.
Calculating current ratio

The current ratio is calculated by dividing a company’s current assets by its current liabilities:

Current Ratio = Current liabilities / Current assets

Current liabilities are due to be paid within one year, while current assets are cash and other liquid items that can be turned into cash within that same time frame.

The numerator and denominator of this calculation are found on a company’s balance sheet. The calculation results in a number that reflects how many times a company could pay its short-term obligations with its current assets.

This calculation can give investors or creditors an idea about how likely it is that the company will be able to repay its debts as they come due.

While other calculations can measure solvency, the current ratio is one of the most commonly used metrics because it’s simple and straightforward.

However, a current ratio is not the best indicator of which company would be a good investment because it changes over time and may not be accurate during specific business periods. For these reasons, investors need to look at other factors when deciding whether or not to invest in a particular company.

How to interpret the current ratio

The current ratio is a measure of liquidity that compares a company’s existing assets to its current liabilities. It’s an essential indicator of a company’s ability to meet its short-term obligations.

A high current ratio indicates that the company has more assets relative to liabilities and is better positioned to meet its obligations. On the other hand, a low current ratio means the company is less able to pay its short-term debts.

The current ratio can be interpreted in two different ways:

1) The most common way to use the current ratio is to compare it with historical data for the company and its peer group to understand whether or not the company has a short-term solvency issue.

2) The second way to use the current ratio is by looking at how it changes over time. This can give you insights into whether or not the company can negotiate longer payment terms with its suppliers, which would lead to a higher current ratio.

What is a good current ratio?

The current ratio measures a company's ability to pay its short-term liabilities with its short-term assets. Here's how to calculate it and what it means for your business.
What is considered good current ratio

A good current ratio is 2:1 or higher, and this means that for every $2 in liabilities, the company has $1 or more in assets that can be used to pay off those liabilities.

Companies with low current ratios may struggle to meet their obligations, while companies with high current ratios may be less attractive to investors.

For example, publicly listed companies in the United States reported a median current ratio of 1.94 in 2022.

Current ratio drawbacks

The current ratio is a popular liquidity measure used to assess a company’s ability to pay its short-term liabilities with its short-term assets. While it has several advantages, the current ratio also has some drawbacks.

One shortcoming of the current ratio includes minimum cash for operations. This can be problematic because it does not consider the fact that some companies have restricted cash that is not always freely available for use by the business. In addition, short-term investments are not always liquid, which can make the current ratio more challenging to calculate.

Another drawback of the current ratio is management’s refusal to recognize bad A/R. When a company has accounts receivable that are unlikely to be paid, this should be reflected in the denominator of the calculation. However, many companies choose to exclude these amounts from their calculations to present a more favorable picture of their liquidity position.

The quick ratio is a more conservative measure of liquidity because it only includes liquid assets. This means that it does not include assets like inventory and prepaid expenses, which can be sold for cash but may take some time. The quick ratio only considers assets that can be sold for money within 90 days with a high degree of certainty. As a result, it is a more accurate measure of a company’s ability to meet its short-term obligations.

People also viewed:

An Exchange Traded Fund, or ETF, is a type of investment fund that trades like a stock on an exchange. They are often offered by large financial institutions and traded by investors worldwide.What is an Exchange Traded Fund (ETF)? Learn how to invest in stocks.How to invest in stocks in 2023: The best way to make money What is a Special Purpose Acquisition Company (SPAC)?What is a special purpose acquisition company (SPAC)? The Internal Rate of Return (IRR) is a financial metric used to calculate the profitability of an investment. Find out more about IRR and how to calculate it.What is the internal rate of return (IRR)? Wondering what a t-test is and how it works? This guide will explain everything you need to know about the t-test statistic, including how to use it in your own data analysis.What is a T-Test: Definition
current ratio current ratio definition current ratio formula what does current ratio mean
Share. Facebook Twitter LinkedIn Reddit Telegram WhatsApp Pinterest Email
Previous Article8 online business ideas you can start now
Next Article WordPress vs. Blogger: Which is better?
Eliott Berthold

Eliott is a Nexym Finance writer. He runs several high yielding portfolios for American and international clients. He teaches first and second year Finance at various universities and enjoys golf and competitive running.

Related Stories

The Internal Rate of Return (IRR) is a financial metric used to calculate the profitability of an investment. Find out more about IRR and how to calculate it.

What is the internal rate of return (IRR)?

March 29, 2022
What is a Special Purpose Acquisition Company (SPAC)?

What is a special purpose acquisition company (SPAC)?

March 28, 2022
An Exchange Traded Fund, or ETF, is a type of investment fund that trades like a stock on an exchange. They are often offered by large financial institutions and traded by investors worldwide.

What is an Exchange Traded Fund (ETF)?

March 28, 2022
Learn how to invest in stocks.

How to invest in stocks in 2023: The best way to make money

March 16, 2022

Comments are closed.

Connect
  • Facebook
  • Twitter
  • Pinterest
  • Instagram
  • YouTube
  • LinkedIn
  • Reddit
  • TikTok
Don't Miss
Are you looking to purchase a laptop in 2023? Please read our guide to help you decide which laptop fits you best. Reviews

The best laptops you can buy today

By Asih Tirta

Are you looking to purchase a laptop in 2023? Please read our guide to help you decide which laptop fits you best.

How to grow your hair faster and thicker

January 26, 2023
Find out how to use the best balance transfer credit cards to start reducing your debt in 2023. Compare offers and find the card that works for you.

The best balance transfer credit cards

January 26, 2023
Discover the best places to visit when traveling and avoid tourist traps! Learn how to get the most out of your trip and save money.

Avoid these tourist traps and visit better locations

January 25, 2023
  • Auto
    • Auto Reviews
    • Electric
    • Insurance
  • Business
    • Company
    • Government
  • Entertainment
    • Movies
    • Music
  • Finance
    • Credit Cards
    • Crypto
    • Market
    • Personal Finance
  • Food
    • Coffee
    • Drinks
    • Holidays
  • Health
  • Beauty
  • Fitness
  • Food
  • Medical
  • Home
  • Backyard
  • Bathroom
  • Bedroom
  • Cleaning
  • Furniture
  • Home Office
  • Kitchen
  • Life
  • Astrology
  • Family
  • Fashion
  • Outdoors
  • Personal
  • Pets
  • Apple
  • Audio
  • Domain Names
  • Gaming
  • Google
  • Power
  • Reviews
  • Samsung
  • Destinations
  • Gear
  • Services
  • Space
  • Tourism
  • Technology
  • Tutorials
  • Web Hosting
  • WiFi
  • WordPress
  • Travel
  • Shopping
  • Sports
  • Work
  • Stocks
  • Television
  • Web Hosting
Facebook Twitter Instagram Pinterest YouTube LinkedIn Reddit TikTok
© 2023 Nexym Media

Type above and press Enter to search. Press Esc to cancel.