top of page

Current Ratio

Updated: Apr 26

The current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations or those due within one year. It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables.


A current ratio that is in line with the industry average or slightly higher is generally considered acceptable. A current ratio that is lower than the industry average may indicate a higher risk of distress or default. Similarly, if a company has a very high current ratio compared with its peer group, it indicates that management may not be using its assets efficiently.


The current ratio is called current because, unlike some other liquidity ratios, it incorporates all current assets and current liabilities. The current ratio is sometimes called the working capital ratio.


Formula and Calculation for the Current Ratio

To calculate the ratio, analysts compare a company’s current assets to its current liabilities.


Current Ratio = Current assets / Current liabilities


  • Current assets listed on a company’s balance sheet include cash, accounts receivable, inventory, and other current assets (OCA) that are expected to be liquidated or turned into cash in less than one year.

  • Current liabilities include accounts payable, wages, taxes payable, short-term debts, and the current portion of long-term debt.

Source: Investopedia, Current Ratio Explained With Formula and Examples, accessed 25 December 2023, <https://www.investopedia.com/terms/c/currentratio.asp>

10 views0 comments

Recent Posts

See All

Beta

Beta (β) is a measure of the volatility-or systematic risk-of a security or portfolio compared to the market as a whole (usually the S&P 500). For beta to provide any useful insight, the market that i

Earnings Surprise

An earnings surprise occurs when a company's reported quarterly or annual profits are above or below analysts' expectations. These analysts, who work for a variety of financial firms and reporting age

Earnings Per Share (EPS)

Earnings per share (EPS) is calculated as a company's profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company's profitability. It is comm

Comments


bottom of page