1. What is the Current Ratio?

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 indicates the financial health of a company and how easily it can pay its debts using its current assets.

2. How Does the Calculator Work?

The calculator uses the Current Ratio formula:

Where:

• Current Assets — Cash and other assets that are expected to be converted to cash within a year
• Current Liabilities — All obligations due within one year

Explanation: The ratio shows how many times a company's current assets can cover its current liabilities. A higher ratio indicates better short-term financial health.

3. Importance of Current Ratio

Details: The Current Ratio is crucial for assessing a company's liquidity position. It helps creditors and investors evaluate whether a company has enough resources to meet its short-term obligations. A ratio below 1 may indicate potential liquidity problems, while a very high ratio might suggest inefficient use of assets.

4. Using the Calculator

Tips: Enter the total value of current assets and current liabilities in dollars. Both values must be positive numbers. The calculator will compute the ratio which is dimensionless.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good Current Ratio?
A: Generally, a Current Ratio between 1.5 and 3 is considered healthy, but this varies by industry. A ratio below 1 may indicate liquidity problems.

Q2: How does Current Ratio differ from Quick Ratio?
A: The Quick Ratio (or Acid-Test Ratio) is more conservative as it excludes inventory from current assets, providing a stricter measure of liquidity.

Q3: Can a Current Ratio be too high?
A: Yes, a very high Current Ratio may indicate that a company is not using its current assets efficiently or not investing excess cash optimally.

Q4: How often should Current Ratio be calculated?
A: It should be calculated regularly, typically quarterly or annually, to monitor a company's short-term financial health over time.

Q5: Does Current Ratio vary by industry?
A: Yes, acceptable Current Ratio values can vary significantly between industries due to different business models and working capital requirements.