1. What Is The Correct Formula For Calculating 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 is calculated by dividing current assets by current liabilities.

2. How Does The Calculator Work?

The calculator uses the Current Ratio formula:

Where:

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

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

3. Importance Of Current Ratio Calculation

Details: The Current Ratio is a key indicator of a company's financial health and liquidity position. It helps creditors and investors assess the company's ability to meet its short-term obligations.

4. Using The Calculator

Tips: Enter current assets and current liabilities in dollars. Both values must be positive numbers greater than zero for accurate calculation.

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. A ratio below 1 may indicate liquidity problems, while a ratio above 3 may suggest inefficient use of assets.

Q2: How does current ratio differ from quick ratio?
A: The quick ratio (acid-test ratio) is more conservative as it excludes inventory from current assets, providing a stricter measure of liquidity.

Q3: Can current ratio be too high?
A: Yes, an excessively high current ratio may indicate that the company is not using its current assets efficiently or is not investing excess cash properly.

Q4: How often should current ratio be calculated?
A: It should be calculated regularly, typically quarterly or annually, to monitor changes in a company's liquidity position over time.

Q5: What are the limitations of current ratio?
A: The ratio doesn't account for the quality of current assets or the timing of cash flows. It should be used in conjunction with other financial metrics for comprehensive analysis.