1. What Is The Formula For Calculating Current Ratio?

The Current Ratio is a financial metric that measures a company's ability to pay its short-term obligations using its current assets. 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 one 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 liquidity metric used by creditors, investors, and management to assess a company's short-term financial stability and ability to meet its immediate 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 of 1.5-3.0 is considered healthy, though this varies by industry. A ratio below 1 may indicate potential liquidity problems.

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

Q3: Can a Current Ratio be too high?
A: Yes, an excessively high Current Ratio may indicate inefficient use of assets or poor working capital management.

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.

Q5: What are the limitations of Current Ratio?
A: It doesn't account for the quality of current assets or the timing of cash flows, and can be manipulated through window dressing techniques.