current ratio business plan

• Search Search Please fill out this field.

What Is the Current Ratio?

• Formula and Calculation

Understanding the Current Ratio

• Interpretation
• How It Changes Over Time
• Current Ratio vs. Other Ratios
• Limitations

The Bottom Line

• Corporate Finance
• Financial Ratios

Current Ratio Explained With Formula and Examples

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.

Key Takeaways

• The current ratio compares all of a company’s current assets to its current liabilities.
• These are usually defined as assets that are cash or will be turned into cash in a year or less and liabilities that will be paid in a year or less.
• The current ratio helps investors understand more about a company’s ability to cover its short-term debt with its current assets and make apples-to-apples comparisons with its competitors and peers.
• One weakness of the current ratio is its difficulty of comparing the measure across industry groups.
• Others include the overgeneralization of the specific asset and liability balances, and the lack of trending information.

Investopedia / Lara Antal

Formula and Calculation for the Current Ratio

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

Current Ratio = Current assets Current liabilities \begin{aligned} &\text{Current Ratio}=\frac{\text{Current assets}}{ \text{Current liabilities}} \end{aligned} ​ Current Ratio = Current liabilities Current assets ​ ​

The current ratio measures a company’s ability to pay current, or short-term, liabilities (debts and payables) with its current, or short-term, assets, such as cash, inventory, and receivables.

In many cases, a company with a current ratio of less than 1.00 does not have the capital on hand to meet its short-term obligations if they were all due at once, while a current ratio greater than 1.00 indicates that the company has the financial resources to remain solvent in the short term. However, because the current ratio at any one time is just a snapshot, it is usually not a complete representation of a company’s short-term liquidity or longer-term solvency .

For example, a company may have a very high current ratio, but its accounts receivable may be very aged , perhaps because its customers pay slowly, which may be hidden in the current ratio. Some of the accounts receivable may even need to be written off. Analysts also must consider the quality of a company’s other assets vs. its obligations. If the inventory is unable to be sold , the current ratio may still look acceptable at one point in time, even though the company may be headed for default.

Public companies don't report their current ratio, though all the information needed to calculate the ratio is contained in the company's financial statements.

Interpreting the Current Ratio

A ratio under 1.00 indicates that the company’s debts due in a year or less are greater than its assets—cash or other short-term assets expected to be converted to cash within a year or less. A current ratio of less than 1.00 may seem alarming, although different situations can negatively affect the current ratio in a solid company.

For example, a normal cycle for the company’s collections and payment processes may lead to a high current ratio as payments are received, but a low current ratio as those collections ebb. Calculating the current ratio at just one point in time could indicate that the company can’t cover all of its current debts , but it doesn’t necessarily mean that it won’t be able to when the payments are due.

Additionally, some companies, especially larger retailers such as Walmart, have been able to negotiate much longer-than-average payment terms with their suppliers. If a retailer doesn’t offer credit to its customers, this can show on its balance sheet as a high payables balance relative to its receivables balance. Large retailers can also minimize their inventory volume through an efficient supply chain , which makes their current assets shrink against current liabilities, resulting in a lower current ratio. Walmart’s current ratio as of January 31, 2023 was 0.82.

In theory, the higher the current ratio, the more capable a company is of paying its obligations because it has a larger proportion of short-term asset value relative to the value of its short-term liabilities. However, though a high ratio—say, more than 3.00—could indicate that the company can cover its current liabilities three times, it also may indicate that it is not using its current assets efficiently, securing financing very well, or properly managing its working capital .

The current ratio can be a useful measure of a company’s short-term solvency when it is placed in the context of what has been historically normal for the company and its peer group. It also offers more insight when calculated repeatedly over several periods.

How the Current Ratio Changes Over Time

What makes the current ratio good or bad often depends on how it is changing. A company that seems to have an acceptable current ratio could be trending toward a situation in which it will struggle to pay its bills. Conversely, a company that may appear to be struggling now could be making good progress toward a healthier current ratio.

In the first case, the trend of the current ratio over time would be expected to harm the company’s valuation. Meanwhile, an improving current ratio could indicate an opportunity to invest in an undervalued stock amid a turnaround.

Imagine two companies with a current ratio of 1.00 today. Based on the trend of the current ratio in the following table, for which would analysts likely have more optimistic expectations?

Two things should be apparent in the trend of Horn & Co. vs. Claws Inc. First, the trend for Claws is negative, which means further investigation is prudent. Perhaps it is taking on too much debt or its cash balance is being depleted—either of which could be a solvency issue if it worsens. The trend for Horn & Co. is positive, which could indicate better collections, faster inventory turnover , or that the company has been able to pay down debt.

The second factor is that Claws’ current ratio has been more volatile , jumping from 1.35 to 1.05 in a single year, which could indicate increased operational risk and a likely drag on the company’s value.

Example Using the Current Ratio

In its Q4 2022 fiscal results, Apple Inc. reported total current assets of $135.4 billion, slightly higher than its total current assets at the end of the last fiscal year of $134.8 billion. However, the company's liability composition significantly changed from 2021 to 2022. At the 2022, the company reported $154.0 billion of current liabilities, almost $29 billion greater than current liabilities from the prior period.

For 2021, Apple had more current assets than current liabilities. Its current ratio was ($134.836b / $125.481b) 1.075. This means that if all current liabilities of Apple were immediately due, the company could pay all of its bills without leveraging long-term assets.

At the end of 2022, it was a slightly different story. Apple's current ratio was ($135.405b / $153.982b) 0.88. This means that Apple technically did not have enough current assets on hand to pay all of its short-term bills. Analysts may not be concerned due to Apple's ability to churn through production, sell inventory, or secure short-term financing (with its $217 billion of non-current assets pledged as collateral, for instance).

Current Ratio vs. Other Liquidity Ratios

Other similar liquidity ratios can supplement a current ratio analysis. In each case, the differences in these measures can help an investor understand the current status of the company’s assets and liabilities from different angles, as well as how those accounts are changing over time.

The commonly used acid-test ratio , or quick ratio , compares a company’s easily liquidated assets (including cash, accounts receivable, and short-term investments, excluding inventory and prepaid expenses) to its current liabilities. The cash asset ratio, or cash ratio , also is similar to the current ratio, but it only compares a company’s marketable securities and cash to its current liabilities.

Companies may use days sales outstanding to better understand how long it takes for a company to collect payments after credit sales have been made. While the current ratio looks at the liquidity of the company overall, the days sales outstanding metric calculates liquidity specifically to how well a company collects outstanding accounts receivables.

Finally, the operating cash flow ratio compares a company’s active cash flow from operating activities (CFO) to its current liabilities. This allows a company to better gauge funding capabilities by omitting implications created by accounting entries.

The current ratio is most useful when measured over time, compared against a competitor, or compared against a benchmark.

Limitations of Using the Current Ratio

One limitation of the current ratio emerges when using it to compare different companies with one another. Businesses differ substantially among industries; comparing the current ratios of companies across different industries may not lead to productive insight.

For example, in one industry, it may be more typical to extend credit to clients for 90 days or longer, while in another industry, short-term collections are more critical. Ironically, the industry that extends more credit actually may have a superficially stronger current ratio because its current assets would be higher. It is usually more useful to compare companies within the same industry.

Another drawback of using the current ratio, briefly mentioned above, involves its lack of specificity. Unlike many other liquidity ratios, it incorporates all of a company’s current assets, even those that cannot be easily liquidated. For example, imagine two companies that both have a current ratio of 0.80 at the end of the last quarter . On the surface, this may look equivalent, but the quality and liquidity of those assets may be very different, as shown in the following breakdown:

In this example, Company A has much more inventory than Company B, which will be harder to turn into cash in the short term. Perhaps this inventory is overstocked or unwanted, which eventually may reduce its value on the balance sheet. Company B has more cash, which is the most liquid asset, and more accounts receivable, which could be collected more quickly than liquidating inventory. Although the total value of current assets matches, Company B is in a more liquid, solvent position.

The current liabilities of Company A and Company B are also very different. Company A has more accounts payable, while Company B has a greater amount in short-term notes payable. This would be worth more investigation because it is likely that the accounts payable will have to be paid before the entire balance of the notes-payable account. Company A also has fewer wages payable, which is the liability most likely to be paid in the short term.

In this example, although both companies seem similar, Company B is likely in a more liquid and solvent position. An investor can dig deeper into the details of a current ratio comparison by evaluating other liquidity ratios that are more narrowly focused than the current ratio.

What Is a Good Current Ratio?

What counts as a good current ratio will depend on the company’s industry and historical performance. Current ratios of 1.50 or greater would generally indicate ample liquidity.

What Happens If the Current Ratio Is Less Than 1?

As a general rule, a current ratio below 1.00 could indicate that a company might struggle to meet its short-term obligations, whereas ratios of above 1.00 might indicate a company is able to pay its current debts as they come due. If a company's current ratio is less than one, it may have more bills to pay than easily accessible resources to pay those bills.

What Does a Current Ratio of 1.5 Mean?

A current ratio of 1.5 would indicate that the company has $1.50 of current assets for every $1 of current liabilities. For example, suppose a company’s current assets consist of $50,000 in cash plus $100,000 in accounts receivable. Its current liabilities, meanwhile, consist of $100,000 in accounts payable. In this scenario, the company would have a current ratio of 1.5, calculated by dividing its current assets ($150,000) by its current liabilities ($100,000).

How Is the Current Ratio Calculated?

Calculating the current ratio is very straightforward: Simply divide the company’s current assets by its current liabilities. Current assets are those that can be converted into cash within one year, while current liabilities are obligations expected to be paid within one year. Examples of current assets include cash, inventory, and accounts receivable. Examples of current liabilities include accounts payable, wages payable, and the current portion of any scheduled interest or principal payments.

The current ratio is a useful liquidity measurement used to track how well a company may be able to meet its short-term debt obligations. It compares the ratio of current assets to current liabilities, and measurements less than 1.0 indicate a company's potential inability to use current resources to fund short-term obligations.

Accounting Tools. " Current Ratio Definition ."

Accounting Tools. " Current Asset Definition ."

Accounting Tools. " Current Liability Definition ."

Walmart. " Walmart Releases Q4 and FY23 Earnings ," Download Full Report, Page 6.

Apple. " Apple Reports Fourth Quarter Results ."

Duke University, Fuqua School of Business. " FSA Note: Summary of Financial Ratio Calculations ," Page 2.

• Guide to Financial Ratios 1 of 31
• What Is the Best Measure of a Company's Financial Health? 2 of 31
• Which Financial Ratios Are Used to Measure Risk? 3 of 31
• Profitability Ratios: What They Are, Common Types, and How Businesses Use Them 4 of 31
• Understanding Liquidity Ratios: Types and Their Importance 5 of 31
• What Is a Solvency Ratio, and How Is It Calculated? 6 of 31
• Solvency Ratios vs. Liquidity Ratios: What's the Difference? 7 of 31
• Key Ratio: Meaning, Example, Pros and Cons 8 of 31
• Multiples Approach 9 of 31
• Return on Assets (ROA): Formula and 'Good' ROA Defined 10 of 31
• How Return on Equity Can Help Uncover Profitable Stocks 11 of 31
• Return on Investment (ROI): How to Calculate It and What It Means 12 of 31
• Return on Invested Capital: What Is It, Formula and Calculation, and Example 13 of 31
• EBITDA Margin: What It Is, Formula, and How to Use It 14 of 31
• What Is Net Profit Margin? Formula for Calculation and Examples 15 of 31
• Operating Margin: What It Is and the Formula for Calculating It, With Examples 16 of 31
• Current Ratio Explained With Formula and Examples 17 of 31
• Quick Ratio Formula With Examples, Pros and Cons 18 of 31
• Cash Ratio: Definition, Formula, and Example 19 of 31
• Operating Cash Flow (OCF): Definition, Types, and Formula 20 of 31
• Receivables Turnover Ratio Defined: Formula, Importance, Examples, Limitations 21 of 31
• Inventory Turnover Ratio: What It Is, How It Works, and Formula 22 of 31
• Working Capital Turnover Ratio: Meaning, Formula, and Example 23 of 31
• Debt-to-Equity (D/E) Ratio Formula and How to Interpret It 24 of 31
• Total Debt-to-Total Assets Ratio: Meaning, Formula, and What's Good 25 of 31
• Interest Coverage Ratio: Formula, How It Works, and Example 26 of 31
• Shareholder Equity Ratio: Definition and Formula for Calculation 27 of 31
• Can Investors Trust the P/E Ratio? 28 of 31
• Using the Price-to-Book (P/B) Ratio to Evaluate Companies 29 of 31
• Price-to-Sales (P/S) Ratio: What It Is, Formula To Calculate It 30 of 31
• Price-to-Cash Flow (P/CF) Ratio? Definition, Formula, and Example 31 of 31

• Terms of Service
• Editorial Policy
• Privacy Policy
• Your Privacy Choices

• SUGGESTED TOPICS
• The Magazine
• Newsletters
• Managing Yourself
• Managing Teams
• Work-life Balance
• The Big Idea
• Data & Visuals
• Reading Lists
• Case Selections
• HBR Learning
• Topic Feeds
• Account Settings
• Email Preferences

A Refresher on Current Ratio

How to calculate whether your company has enough cash.

One of the biggest fears of a small business owner is running out of cash. But large businesses in financial trouble face the same risk. To know whether a company is truly on the cusp of hitting a $0 balance in their accounts, you can’t simply look at the income statement. You need to run a simple calculation using a few figures.

• Amy Gallo is a contributing editor at Harvard Business Review, cohost of the Women at Work podcast , and the author of two books: Getting Along: How to Work with Anyone (Even Difficult People) and the HBR Guide to Dealing with Conflict . She writes and speaks about workplace dynamics. Watch her TEDx talk on conflict and follow her on LinkedIn . amyegallo

Partner Center

How to Calculate (And Interpret) The Current Ratio

Janet Berry-Johnson, CPA

Reviewed by

March 10, 2022

This article is Tax Professional approved

All businesses have bills to pay. Your ability to pay them is called "liquidity," and liquidity is one of the first things that accountants and investors will look at when assessing the health of your business.

I am the text that will be copied.

The current ratio (also known as the current asset ratio , the current liquidity ratio , or the working capital ratio ) is a financial analysis tool used to determine the short-term liquidity of a business. It takes all of your company’s current assets, compares them to your short-term liabilities, and tells you whether you have enough of the former to pay for the latter.

In other words, the current ratio is a good indicator of your company’s ability to cover all of your pressing debt obligations with the cash and short-term assets you have on hand. It’s one of the ways to measure the solvency and overall financial health of your company.

Here, we’ll go over how to calculate the current ratio and how it compares to some other financial ratios.

How do you calculate the current ratio?

You calculate your business’s overall current ratio by dividing your current assets by your current liabilities .

To do this, you’ll need to get familiar with your balance sheet —as one of the three primary financial statements your business produces, your balance sheet helps you get a sense of the big picture and serves as a historical record of a specific moment in time.

Current assets (also called short-term assets) are cash or any other asset that will be converted to cash within one year . You can find them on the balance sheet, alongside all of your business’s other assets.

The five major types of current assets are:

Cash and cash equivalents . These include cash and short-term securities that your business can quickly sell and convert into cash, like treasury bills, short-term government bonds, and money market funds.

Marketable securities . These typically have a maturity period of one year or less, are bought and sold on a public stock exchange, and can usually be sold within three months on the market. Examples include common stock, treasury bills, and commercial paper.

Accounts receivable . This account is used to keep track of any money customers owe for products or services already delivered and invoiced for.

Inventory . This includes all the goods and materials a business has stored for future use, like raw materials, unfinished parts, and unsold stock on shelves.

Prepaid expenses . These are future expenses that have been paid in advance that haven’t yet been used up or expired. Generally, prepaid expenses that will be used up within one year are initially reported on the balance sheet as a current asset. As the amount expires, the current asset is reduced and the amount of the reduction is reported as an expense on the income statement.

Your current liabilities (also called short-term obligations or short-term debt) are:

• Any outstanding bill payments
• Short-term loans
• Any other kind of short-term liability that your business must pay back within the next 12 months

You can find them on your company’s balance sheet, alongside all of your other liabilities.

Current liabilities do not include long-term debt, like bonds, lease obligations, and long-term notes payable.

Here are a few common examples of current liabilities:

• Credit card debt
• Notes payable that mature within one year
• Wages payable
• Deferred revenue
• Accounts payable
• Accrued liabilities (also known as accrued expenses) like dividend, income tax, and payroll

What is the current ratio formula?

You calculate the current ratio by dividing your company’s current assets by your current liabilities, i.e.:

Current ratio = total current assets / total current liabilities

Let’s imagine that your fictional company, XYZ Inc., has $15,000 in current assets and $22,000 in current liabilities. Its current ratio would be:

Current ratio = $15,000 / $22,000 = 0.68

That means that the current ratio for your business would be 0.68.

A company with a current ratio of less than one doesn’t have enough current assets to cover its current financial obligations. XYZ Inc.’s current ratio is 0.68, which may indicate liquidity problems.

But that’s also not always the case.

A low current ratio could also just mean that you’re in an industry where it’s normal for companies to collect payments from customers quickly but take a long time to pay their suppliers, like the retail and food industries.

Or it could mean that your company is very good at keeping inventory low. (Remember: inventory is included in current assets.)

A high current ratio, on the other hand, may indicate inefficient use of assets, or a company that’s hanging on to excess cash instead of reinvesting it in growing the business.

What is a good current ratio?

As with many other financial metrics, the ideal current ratio will vary depending on the industry, operating model, and business processes of the company in question.

In general, a current ratio between 1.5 and 3 is considered healthy. Ratios lower than 1 usually indicate liquidity issues, while ratios over 3 can signal poor management of working capital.

The definition of a “good” current ratio also depends on who’s asking. In many cases, lenders prefer high current ratios, since it indicates that the company won’t have any issues paying the creditor back, while investors may take a high current ratio as a signal of operational inefficiencies.

Current vs. quick ratio

The quick ratio (also sometimes called the acid-test ratio) is a more conservative version of the current ratio.

The quick ratio differs from the current ratio in that it leaves inventory out and keeps the three other major types of current assets: cash equivalents, marketable securities, and accounts receivable.

So the equation for the quick ratio is:

Quick ratio = (cash equivalents + marketable securities + accounts receivable) / current liabilities

Because inventory levels vary widely across industries, in theory, this ratio should give us a better reading of a company’s liquidity than the current ratio. But it’s important to put it in context.

A lower quick ratio could mean that you’re having liquidity problems, but it could just as easily mean that you’re good at collecting accounts receivable quickly.

Similarly, a higher quick ratio doesn’t automatically mean you’re liquid, especially if you encounter unexpected problems collecting receivables

Current vs. cash ratio

Looking for an even purer (in theory) liquidity test? You want the cash ratio.

The cash ratio takes accounts receivable out of the equation, leaving you with only cash equivalents and marketable securities to cover your current liabilities:

Cash ratio = (cash equivalents + marketable securities) / current liabilities

If you have a high cash ratio, you’re sitting pretty. It’s the most conservative measure of liquidity and, therefore, the most reliable, industry-neutral method of calculating it.

Advanced ratios

Financial analysts will often also use two other ratios to calculate the liquidity of a business: the current cash debt coverage ratio and the cash conversion cycle (CCC) .

The current cash debt coverage ratio is an advanced liquidity ratio. It measures how capable a business is of paying its current liabilities using the cash generated by its operating activities (i.e., money your business brings in from its ongoing, regular business activities).

The cash conversion cycle (CCC) is a metric that expresses the time (in days) it takes for a company to convert its investments in inventory and other resources into cash flows from sales.

These calculations are fairly advanced, and you probably won’t need to perform them for your business, but if you’re curious, you can read more about the current cash debt coverage ratio and the CCC .

Related Posts

LIFO: The Last In First Out Inventory Method

Last In, First Out (FIFO) is a method of inventory valuation that assumes you sell your newest inventory first. How does this affect the books? Read on for a definition and examples!

Owner’s Equity: What It Is and How to Calculate It

If you had to liquidate your business today, how much could you get out of it? Your owner’s equity account has the answers.

Pro Forma Financial Statements (with Templates and Examples)

As an essential ingredient in financial forecasting, pro forma statements let you try on the future for size—and see which business moves are the right fit for you.

Join over 140,000 fellow entrepreneurs who receive expert advice for their small business finances

Get a regular dose of educational guides and resources curated from the experts at Bench to help you confidently make the right decisions to grow your business. No spam. Unsubscribe at any time.

How to Use These Common Business Ratios

2 min. read

Updated October 27, 2023

What business ratios should you know and be using? Here’s a breakdown of common ratios, how they’re used, and in some cases how you’ll calculate them.

Main ratios

• Current. Measures company’s ability to meet financial obligations. Expressed as the number of times current assets exceed current liabilities. A high ratio indicates that a company can pay its creditors. A number less than one indicates potential cash flow problems.
• Quick. This ratio is very similar to the Acid Test (see below), and measures a company’s ability to meet its current obligations using its most liquid assets. It shows Total Current Assets excluding Inventory divided by Total Current Liabilities.
• Total Debt to Total Assets. Percentage of Total Assets financed with debt.
• Pre-Tax Return on Net Worth. Indicates shareholders’ earnings before taxes for each dollar invested. This ratio is not applicable if the subject company’s net worth for the period being analyzed has a negative value.
• Pre-Tax Return on Assets. Indicates profit as a percentage of Total Assets before taxes. Measures a company’s ability to manage and allocate resources.

Additional ratios

• Net Profit Margin. This ratio is calculated by dividing Sales into the Net Profit, expressed as a percentage.
• Return on Equity. This ratio is calculated by dividing Net Profit by Net Worth, expressed as a percentage.

Activity ratios

• Accounts Receivable Turnover. This ratio is calculated by dividing Sales on Credit by Accounts Receivable. This is a measure of how well your business collects its debts.
• Collection Days. This ratio is calculated by multiplying Accounts Receivable by 360, which is then divided by annual Sales on Credit. Generally, 30 days is exceptionally good, 60 days is bothersome, and 90 days or more is a real problem.
• Inventory Turnover. This ratio is calculated by dividing the Cost of Sales by the average Inventory balance.
• Accounts Payable Turnover. This ratio is a measure of how quickly the business pays its bills. It divides the total new Accounts Payable for the year by the average Accounts Payable balance.
• Payment Days. This ratio is calculated by multiplying average Accounts Payable by 360, which is then divided by new Accounts Payable.
• Total Asset Turnover. This ratio is calculated by dividing Sales by Total Assets.

Debt ratios

• Debt to Net Worth. This ratio is calculated by dividing Total Liabilities by total Net Worth.
• Current Liab. to Liab. This ratio is calculated by dividing Current Liabilities by Total Liabilities.

Liquidity ratios

• Net Working Capital. This ratio is calculated by subtracting Current Liabilities from Current Assets. This is another measure of cash position.
• Interest Coverage. This ratio is calculated by dividing Profits Before Interest and Taxes by total Interest Expense.
• Assets to Sales. This ratio is calculated by dividing Assets by Sales.
• Current Debt/Total Assets. This ratio is calculated by dividing Current Liabilities by Total Assets.
• Acid Test. This ratio is calculated by dividing Current Assets (excluding Inventory and Accounts Receivable) by Current Liabilities.
• Sales/Net Worth. This ratio is calculated by dividing Total Sales by Net Worth.
• Dividend Payout. This ratio is calculated by dividing Dividends by Net Profit.

In the real world, financial profile information involves some compromise. Very few organizations fit any one profile exactly. Variations, such as doing several types of business under one roof, are quite common. If you cannot find a classification that fits your business exactly, use the closest one and explain in your text how and why your business is different from the standard.

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

Table of Contents

Related Articles

5 Min. Read

How to Improve the Accuracy of Financial Forecasts

6 Min. Read

How to Forecast Sales for a Subscription Business

10 Min. Read

How to Create a Cash Flow Forecast

11 Min. Read

How to Create a Sales Forecast

The Bplans Newsletter

The Bplans Weekly

Subscribe now for weekly advice and free downloadable resources to help start and grow your business.

We care about your privacy. See our privacy policy .

The quickest way to turn a business idea into a business plan

Fill-in-the-blanks and automatic financials make it easy.

No thanks, I prefer writing 40-page documents.

Discover the world’s #1 plan building software

Current Ratio: Essential Guide for Financial Health Analysis

• Banking & Finance
• Bookkeeping
• Business Operations
• Starting a Business

The current ratio is a crucial financial metric that gauges a company’s ability to meet its short-term obligations with its available assets. It is a liquidity ratio that compares a company’s current assets to its current liabilities, reflecting its financial health and liquidity position. A higher current ratio generally indicates a greater ability to cover short-term liabilities, while a lower ratio might signify potential financial difficulties.

Understanding and calculating the current ratio can provide valuable insights into a company’s performance and stability. This financial metric takes into account various components such as cash, accounts receivable, inventory, and other current assets, as well as current liabilities like accounts payable and short-term debt. By dividing current assets by current liabilities, we obtain the current ratio, which can help stakeholders evaluate a company’s short-term liquidity and overall financial health.

Key Takeaways

• The current ratio is a significant financial metric that measures a company’s ability to meet short-term obligations using its available assets.
• Calculation of the current ratio involves dividing a company’s current assets by its current liabilities, providing insights into its liquidity and financial health.
• While informative, the current ratio alone might not suffice for a comprehensive financial analysis, necessitating consideration of other liquidity ratios and metrics.

Understanding the Current Ratio

Definition and importance.

The Current Ratio is a liquidity ratio that helps measure a company’s ability to pay its short-term obligations or those due within one year. This financial metric is crucial for investors and analysts in determining how a company can maximize the use of its current assets to meet its financial obligations.

Being a liquidity ratio, it compares a company’s current assets, which are convertible into cash within a year, with its current liabilities, which must be paid off within the same period. A healthy current ratio indicates that the company is capable of meeting its short-term liabilities and can be a sign of sound financial management. However, it is essential to note that the current ratio may vary across different industries, so comparing companies within the same industry group is recommended.

Current Ratio Formula

Calculating the current ratio is relatively straightforward. The formula is as follows:

Current Ratio = Current Assets / Current Liabilities

Let’s break it down:

• Current Assets : These include cash, cash equivalents, marketable securities, accounts receivable, inventory, and other assets expected to be realized, sold, or consumed within one year.
• Current Liabilities : These are obligations that the company must repay within one year, such as accounts payable, short-term debt (e.g., bank loans), taxes payable, and other accrued expenses.

Consider the following example:

In this case, the current ratio of Company XYZ is:

Components of Current Ratio

The current ratio is a vital financial metric that assesses a company’s ability to cover its short-term debts using its most liquid assets. To properly analyze the current ratio, it’s essential to understand its components, consisting of current assets and current liabilities .

Assessing Current Assets

Current assets are resources that are expected to be converted into cash, sold, or consumed within one year or the company’s normal operating cycle, whichever is longer. They usually include:

• Cash : Physical currency and demand deposit balances held by financial institutions.
• Cash Equivalents : Highly liquid, low-risk investments that can be easily converted to cash, typically within three months (e.g., U.S. Treasury bills and certain money market funds).
• Accounts Receivable : Amounts owed to the company by customers for goods or services provided on credit.
• Inventory : Goods available for sale or materials used in production.

Evaluating Current Liabilities

Current liabilities are financial obligations that a company needs to fulfill within one year or its normal operating cycle, whichever is longer. Common types of current liabilities include:

• Accounts Payable : Amounts owed by the company to suppliers or service providers, usually as a result of purchasing goods or services on credit.
• Short-term Debt : Borrowings with a maturity of less than one year, such as commercial paper, short-term loans, and notes payable.
• Accrued Expenses : Liabilities for expenses incurred but not yet paid, like wages, interest, and taxes.

To calculate the current ratio, divide the company’s total current assets by its total current liabilities:

Current Ratio = (Current Assets) / (Current Liabilities)

A higher current ratio typically indicates a stronger financial position, as it implies that a company has sufficient resources to settle its short-term obligations. However, it’s essential to compare the current ratio to industry benchmarks, as the optimal level can vary across different sectors.

Calculating the Current Ratio

Detailed calculation process.

The current ratio is a financial metric that helps determine a company’s ability to meet its short-term obligations, reflecting its liquidity. The current ratio formula is:

To calculate the current ratio, follow these steps:

• Identify Current Assets : Current assets typically include cash, accounts receivable, inventory, and other assets expected to be converted into cash or used up within a year. You can find these values on the company’s balance sheet.
• Identify Current Liabilities : Current liabilities consist of obligations that a company must fulfill within a year, such as accounts payable, short-term debt, and taxes payable. These values can also be found on the balance sheet.
• Divide Current Assets by Current Liabilities : Calculate the current ratio by dividing the value of current assets by current liabilities.

For example, consider a company with the following financials:

To calculate the current ratio:

Current Ratio = 100,000 / 75,000 = 1.33

Interpreting Results

The result of the current ratio calculation offers insights into the liquidity of the business. A higher current ratio indicates a greater ability to meet short-term obligations.

• A current ratio greater than 1 signifies that a company has more current assets than liabilities, suggesting adequate liquidity to cover short-term obligations.
• A current ratio equal to 1 indicates that current assets and liabilities are equal, which could imply potential difficulty in meeting obligations.
• A current ratio less than 1 reveals that a company has insufficient current assets to cover its current liabilities, potentially leading to liquidity issues.

It is essential to consider the industry context while interpreting the current ratio. Different industries may have varying acceptable norms for current ratios, and a good current ratio in one industry might be considered insufficient in another. Comparing the current ratio with industry peers can provide a better understanding of where a company stands in terms of liquidity.

Current Ratio in Financial Analysis

Assessment by investors and analysts.

The current ratio is a vital liquidity ratio in financial analysis, which serves as a measure of a company’s ability to meet its short-term obligations or those due within one year. This ratio is calculated by dividing a company’s total current assets by its total current liabilities. A current ratio greater than 1 signifies that the company can sufficiently cover its short-term liabilities using its current assets.

Investors and analysts use the current ratio to assess a company’s financial health, as it reflects the capacity of the company to effectively handle its financial obligations. Furthermore, the higher the current ratio, the stronger the company’s liquidity position becomes, while a lower ratio indicates potential difficulty in meeting its short-term financial obligations.

Comparing with Industry Averages

Apart from examining the current ratio individually, it is also crucial to compare it with industry averages and competitors’ ratios. Doing so allows investors and analysts to gauge the relative financial soundness of a company within its industry. However, one must remain cautious while making such comparisons, as different industries may have varying industry averages, which can lead to inaccurate conclusions if not considered appropriately.

A comparative analysis can be done in the following ways:

• Peer Group Comparison: By comparing the company’s current ratio with a group of similar-sized competitors within the same industry to determine its relative position.
• Industry Average Comparison: Analyzing the company’s current ratio against the industry average to assess its financial health in comparison to the overall industry.
• Historical Comparison: Evaluating the company’s current ratio trends over time to identify potential improvements or declines in its financial position.

In conclusion, the current ratio’s significance in financial analysis lies in its ability to measure a company’s ability to address short-term obligations while considering the industry context. By comparing current ratios and industry averages, investors, and analysts can make better-informed decisions regarding the financial health of a company.

Liquidity Measurements Beyond Current Ratio

Quick ratio and cash ratio.

The quick ratio and cash ratio are two other liquidity ratios that provide a deeper insight into a company’s financial health. The quick ratio, also known as the acid-test ratio , is a more stringent measure of liquidity than the current ratio. It excludes inventory from current assets, as not all businesses can quickly turn their inventory into cash. The calculation formula is as follows:

Quick Ratio = (Current Assets – Inventory) / Current Liabilities

This ratio reflects a company’s ability to meet its short-term obligations considering only its most liquid assets.

On the other hand, the cash ratio is an even stricter measure when compared to the quick ratio. This ratio considers only cash and cash equivalents to meet a company’s short-term obligations. The formula to calculate cash ratio is:

Cash Ratio = Cash and Cash Equivalents / Current Liabilities

A higher cash ratio indicates a company has enough readily available funds to cover its short-term debts.

Working Capital and Acid-Test Ratio

Working capital is a simple yet essential liquidity measurement. It is the difference between current assets and current liabilities. Working capital helps to identify potential financial issues and assess a company’s ability to meet its short-term obligations.

Positive working capital indicates that a company has more current assets than liabilities and can cover upcoming expenses. Negative working capital implies that the company may struggle to meet its financial obligations.

The acid-test ratio mentioned previously is another important liquidity measurement. Similar to the quick ratio, it takes into account the company’s highly liquid assets but excludes inventory, as it can take time to convert it into cash. A higher acid-test ratio suggests that a company is better equipped to settle its outstanding debts.

In conclusion, while the current ratio is a useful liquidity measurement, one should also consider other ratios like the quick ratio, cash ratio, working capital, and acid-test ratio for a more comprehensive understanding of a company’s financial position and liquidity.

Limitations of the Current Ratio

Understanding potential misinterpretations.

The current ratio, while useful in assessing a company’s short-term liquidity, has certain limitations that can lead to potential misinterpretations. One limitation is that the ratio assumes all current assets can be easily converted into cash. However, in reality, some current assets like inventory and marketable securities may not be as liquid as cash. Therefore, relying solely on the current ratio could provide a misleading sense of a company’s liquidity.

Another challenge is the possible over-emphasis on conservative measures. A high current ratio could indicate that a company has a surplus of current assets, which seems positive in terms of liquidity. However, this conservatism may also indicate inefficient use of resources, as excess current assets could be better utilized for growth and investment opportunities.

Considering Contextual Factors

It is important to consider contextual factors when evaluating the current ratio, as these factors influence the interpretation and significance of the ratio. Some of these factors include:

• Industry differences : Interpreting the current ratio may vary depending on the industry, as some industries may have longer short-term credit extensions or unique working capital requirements. Comparing the current ratio across different industries can result in inaccurate conclusions.
• Seasonal fluctuations : Some businesses experience seasonal fluctuations, which can impact their current assets and liabilities. These fluctuations may cause temporary distortions in the current ratio, making it less reliable as an indicator of short-term liquidity during certain periods.
• Accounting policies : Different accounting policies can affect the valuation of current assets, such as inventory valuation methods (i.e., LIFO and FIFO). These variations could lead to inconsistencies when comparing current ratios across different companies.

In conclusion, while the current ratio offers valuable insights into a company’s short-term liquidity, it is essential to recognize its limitations and consider contextual factors. This comprehensive analysis will help ensure that decision-makers have a more accurate understanding of a company’s liquidity position.

Case Studies and Real-world Examples

Notable company analyses.

One well-known example of the application of the current ratio in evaluating a company’s financial status is the analysis of Walmart . Walmart, a leading retail corporation, has consistently maintained a low current ratio . This is partly due to its efficient inventory management and strong supplier relationships, enabling the company to pay its short-term obligations with ease.

Another example in the tech industry is Advanced Micro Devices (NASDAQ: AMD), which has a current ratio of 2.1 . This means that AMD can cover its debt due within one year over two times with its liquid assets, indicating a strong financial position.

Industry-Specific Examples

Companies from different industries may have varying ideal current ratio ranges, as each industry has unique operational practices and financial resources. For instance, a manufacturing company might require a higher ratio due to substantial investments in inventory and fixed assets, while a service-based company might need a lower ratio due to lower overhead costs and inventory requirements.

Here are a few industry-specific examples with their respective current ratio ranges:

• Manufacturing : 1.5 to 3.0
• Retail : 1.2 to 2.0
• Service : 1.0 to 2.0

These industry-specific examples serve as a guideline for investors and analysts to better understand the ideal current ratio range in relation to the company’s sector of operation.

In certain cases, an undervalued stock may have a current ratio below the industry average due to temporary difficulties such as a turnaround or a drop in historical performance . In such scenarios, it is essential to examine other financial ratios and company-specific factors before making any investment decisions.

Improving Current Ratio and Liquidity

Strategies for business managers.

One essential aspect of managing a business’s financial health is improving its current ratio and liquidity. A company’s current ratio is calculated by dividing its current assets by its current liabilities. The higher the ratio, the better the company’s ability to meet its short-term obligations. To improve the current ratio, managers can focus on the following strategies:

• Increasing cash flow: Boosting cash inflow by optimizing pricing, collecting receivables faster, and managing inventory efficiently.
• Reducing debts: Managing liabilities by settling outstanding debts, negotiating better payment terms with creditors, and cutting non-essential expenses.
• Strategic investing: Allocating resources in profitable ventures and divesting underperforming assets to generate a positive return on investments.

By implementing these strategies, business managers can strengthen their company’s liquidity position and reduce the risk of financial distress.

Investor Perspective on Improvement

Investors also play a crucial role in a company’s efforts to improve its current ratio and liquidity. A company with a strong liquidity position is more attractive to investors, as it indicates a lower risk of default and higher chances of fulfilling short-term obligations. Investors can contribute to a company’s liquidity improvement by:

• Investing in short-term assets: Allocating funds to assets that generate quick returns, such as marketable securities, can help increase the company’s current assets.
• Providing credit: Investors can offer credit facilities that enable the company to manage its debts and negotiate better terms with its creditors.
• Supporting financial restructuring: Investors can back initiatives that involve debt refinancing or converting short-term debt into equity, which can help reduce the company’s liability burden.

By understanding and supporting a company’s efforts to improve its current ratio and liquidity, investors can make informed decisions that protect their interests and contribute to the overall stability of the business.

Frequently Asked Questions

How is the current ratio calculated in financial analysis.

The current ratio is calculated by dividing a company’s current assets by its current liabilities. Current assets include cash, accounts receivable, and other assets that can be converted to cash within one year. Current liabilities are the obligations a company must fulfill within one year, such as accounts payable and short-term debt.

What does a current ratio indicate about a company’s financial health?

The current ratio is a liquidity ratio that measures a company’s ability to meet its short-term obligations. A higher current ratio indicates that a company can easily cover its short-term debts with its liquid assets. Generally, a current ratio above 1 suggests financial stability, while a ratio below 1 may signify potential liquidity problems.

In what ways can a company improve its current ratio?

To improve its current ratio, a company can take several actions such as increasing its current assets by collecting receivables more quickly or investing in liquid assets. Additionally, the company can reduce its current liabilities by paying off short-term debts or negotiating better payment terms with suppliers.

How does the current ratio compare to the quick ratio in liquidity measurement?

While both the current ratio and the quick ratio measure a company’s liquidity, the quick ratio is considered a more stringent measure as it excludes inventory from current assets. The quick ratio, also known as the acid-test ratio, gauges a firm’s capacity to cover its current liabilities with its most liquid assets. Hence, it is a more conservative estimate of a company’s liquidity compared to the current ratio.

What are the implications of having a current ratio less than 1?

A current ratio below 1 indicates that a company might struggle to meet its short-term obligations, as its current assets are insufficient to cover its current liabilities. This situation could lead to potential cash flow issues, difficulties in obtaining financing, or even bankruptcy in extreme cases. However, it is important to consider the industry context and specific financial situation of a company before drawing conclusions.

What can be considered a generally good current ratio for a healthy business?

Although the ideal current ratio may vary by industry, a ratio above 1 is typically considered healthy, indicating that a company can cover its short-term obligations. A current ratio of 2 implies that the company has twice the amount of current assets as liabilities, providing a comfortable liquidity buffer. However, a very high current ratio might indicate that a company is not efficiently utilizing its assets, which can be detrimental to the business in the long run.

• 1-800-711-3307
• Expense management
• Corporate card
• Tax returns & preparation
• Payment processing
• Tax compliance
• Vision & clarity
• Accounting mobile app
• Reduce your accounting expenses
• What does a bookkeeper do
• Why outsource
• Cash vs. Accrual Accounting
• Guides & ebooks
• How Finally works
• Privacy policy
• Terms of service

*Finally is not a CPA firm © 2024 Finally, Backoffice.co , Inc. All rights reserved.

19 Key Small Business Financial Ratios to Track

Key performance indicators (KPIs) were top of mind for finance teams surveyed for NetSuite’s Winter Outlook report. Finance teams said they’re focused on using data more effectively, producing better reports on KPIs and finding ways to save money. But executives who didn't work in finance had different priorities. One possible explanation for the rift, according to the report analysts, is that financial data needs context. It needs an accompanying narrative to illustrate the point and show the state of the business' finances. One way to simplify the data and make it more accessible for investors, lenders and internal stakeholders is using financial ratios.

What Is a Financial Ratio?

A financial ratio is a measure of the relationship between two or more components on the company’s financial statements. These ratios give you a quick and straightforward way to track performance, benchmark against those within an industry, spot trouble and proactively put solutions in place.

Why Is Measuring Financial Ratios Important?

Ratios help business leaders compare the company with competitors and more generally with those within their given industry. They enable a business to benchmark its performance and target areas for improvement. They help companies see problematic areas and put measures in place to prevent or ease potential issues. And if the business is seeking outside funding from a bank or an investor, financial ratios provide those stakeholders with the information needed to see if the business will be able to pay the money back and produce a strong return on investment.

19 Key Financial Ratios to Track

Financial ratios measure profitability, liquidity, operational efficiency and solvency.

Ratios that help determine profitability

The data used to calculate these ratios are usually on the income statement.

Gross profit margin:

Higher gross profit margins indicate the company is efficiently converting its product (or service) into profits. The cost of goods sold is the total amount to produce a product, including materials and labor. Net sales is revenue minus returns, discounts and sales allowances.

Gross profit margin = net sales – cost of goods or services sold/net sales X 100

Net profit margin:

Higher net profit margins show that the company is efficiently converting sales into profit. Look at similar companies to benchmark success as net profit margins will vary by industry.

Net profit margin = net profit/sales X 100

Operating profit margin:

Increasing operating margins can indicate better management and cost controls within a company.

Operating profit margin = gross profit – operating expenses/revenue X 100

Gross profit minus operating expenses  is also known as earnings before interest and taxes (EBIT ). 

Return on equity:

This measures the rate of return shareholders get on their investment after taxes.

Return on equity = net profit/shareholder’s equity

Ratios that measure liquidity

These metrics measure how fast a company can pay back its short-term debts. Use information from the balance sheet and the cash flow statement for these ratios.

Working capital or current ratio:

Working capital ratio = current assets/current liabilities

Cash ratio:

This measure is similar to the working capital ratio, but only takes cash and cash equivalents into account. This will not include inventory.

Cash ratio = cash and cash equivalents/current liabilities

Cash equivalents are investments that mature within 90 days, such as some short-term bonds and treasury bills.

Quick ratio :

Similar to the cash ratio, but also takes into account assets that can be converted quickly into cash.

Quick ratio = current assets – inventory – prepaid expenses/current liabilities

Cash flow to debt ratio:

Measures how much of the business' debt could be paid with the operating cash flow . For example, if this ratio is 2, the company earns $2 for every dollar of liabilities that it can cover. Another way of looking at it is that the business can cover its liabilities twice over.

Cash flow to debt ratio = operating cash flow/debt

There are a couple ways to calculate the operating cash flow. One is to subtract operating expenses from total revenue. This is known as the direct method.

Operating cash flow to net sales ratio:

Measures how much cash the business generates relative to sales. Accounting Tools says this number should stay the same as sales increase. If it’s declining, it could be a sign of cash flow problems .

Operating cash flow to net sales ratio = operating cash flow/net sales

Free cash flow to operating cash flow ratio:

Investors usually like to see high free cash flow. And a higher ratio here is a good indicator of financial health.

Free cash flow = cash from operations — capital expenditures

Free cash flow to operating cash flow ratio = free cash flow/operating cash flow

Ratios that measure operational efficiency

These ratios point to the company’s core business activities. They’re calculated using information found on the balance sheet and income statement.

Revenue per employee:

How efficient and productive are employees? This ratio is a good way to see how efficiently a business manages its workforce  and should be benchmarked against similar businesses.

Revenue per employee = annual revenue/average number of employees in the same year

Return on total assets:

Looks at the efficiency of assets in generating a profit.

Return on total assets = net income/average total assets

Calculate average total assets by adding up all assets at the end of the year plus all the assets at the end of the prior year and divide that by 2.

Inventory turnover:

Examines how efficiently the company sells inventory. Start with the average inventory by taking the inventory balance from a specific period (a quarter, for example) and add it to the prior quarter inventory balance. Divide that by two for the average inventory.

Inventory turnover = cost of goods sold/average inventory

Accounts receivable turnover:

Accounts receivable turnover = net annual credit sales/average accounts receivable.

Average collection:

This is a related measure to give a business the sense of how long it takes for customers to pay their bills. Here’s the formula to calculate the average collection period for a given year.

Average collection = 365 X accounts receivable turnover ratio/net credit sales

To calculate net credit sales, use this formula:

Net credit sales = sales on credit — sales returns — sales allowances

Days payable outstanding (DPO):

The average number of days it takes the company to make payments to creditors and suppliers. This ratio helps the business see how well it's managing cash flow. To calculate DPO, start with the average accounts payable for a given time (could be a month, quarter or year):

Average accounts payable = accounts payable balance at beginning of period — ending accounts payable balance/2

DPO = average accounts payable/cost of goods sold x number of days in the accounting period

The resulting DPO figure is the average number of days it takes for a company to pay its bills.

Days Sales Outstanding:

Shows how long on average it takes for customers to pay a company for goods and services.

Days sales outstanding = accounts receivable for a given period/total credit sales X number of days in the period

Ratios that help determine solvency

These ratios look at a business’ ability to meet long-term liabilities using figures from the balance sheet.

Debt to equity ratio:

An indication of a company’s ability to repay loans.

Debt to equity ratio = total liabilities/shareholder’s equity

Debt to asset ratio:

Gives a sense of how much the company is financing its assets. A high debt to asset ratio could be a sign of financial trouble.

Debt to asset ratio = total liabilities/total assets

#1 Cloud Accounting Software

How to Use Financial Ratios

These financial ratios provide easy-to-access and insightful information for potential investors and lenders. The ratios are a way for startups to show investors that the business is financially solid. The ratios related to accounts receivable  are especially important for small businesses seeking loans. According to peer-to-peer lending marketplace Funding Circle , banks appraise eligible receivables at 70%–80% of their value for asset-backed loans.

Financial ratios are for more than just securing funding. They can be used to provide KPIs and help guide strategic decisions to meet business goals. For example, calculating inventory turnover and comparing it to industry averages helps a company strike a balance between having too much cash tied up in inventory or too little inventory on hand to meet demand.

The Federal Reserve Bank of Chicago found that there is a direct correlation between financial management and financial health of small businesses. And the more often a small business analyzes the numbers from sound financial management practices, the higher its success rate. Those that do it annually, the U.S. Small Business Administration says, have a success rate as low as 25%. Done monthly or weekly, those rates climb to 75–85% and 95% respectively. And these small business financial ratios are a way to see and track insightful information.

All of this information will come from a company’s financial statements. Using technology to automate the accounting process to create the static financial statements saves time and eliminates human error. Using small business accounting software  gives you more accurate and complete financial information and makes calculating the financial ratios quicker and simpler. Understanding the context of the ratios is the important first step. But automating the processes behind the ratios gives you a clearer, more accurate and easier-to-understand picture of your company’s finances.

Financial Management

Small Business Financial Management: Tips, Importance and Challenges

It is remarkably difficult to start a small business. Only about half stay open for five years, and only a third make it to the 10-year mark. That’s why it’s vital to make every effort to succeed. And one of the most fundamental skills and tools for any small business owner is sound financial management.

More On This

Trending Articles

Learn How NetSuite Can Streamline Your Business

NetSuite has packaged the experience gained from tens of thousands of worldwide deployments over two decades into a set of leading practices that pave a clear path to success and are proven to deliver rapid business value. With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support.

Before you go...

Discover the products that 37,000+ customers depend on to fuel their growth.

Before you go. Talk with our team or check out these resources.

Want to set up a chat later? Let us do the lifting.

NetSuite ERP

Explore what NetSuite ERP can do for you.

Business Guide

Complete Guide to Cloud ERP Implementation

• Starting a Business
• Growing a Business
• Small Business Guide
• Business News
• Science & Technology
• Money & Finance
• For Subscribers
• Write for Entrepreneur
• Entrepreneur Store
• United States
• Asia Pacific
• Middle East
• South Africa

Copyright © 2024 Entrepreneur Media, LLC All rights reserved. Entrepreneur® and its related marks are registered trademarks of Entrepreneur Media LLC

• Write Your Business Plan | Part 1 Overview Video
• The Basics of Writing a Business Plan
• How to Use Your Business Plan Most Effectively
• 12 Reasons You Need a Business Plan
• The Main Objectives of a Business Plan
• What to Include and Not Include in a Successful Business Plan
• The Top 4 Types of Business Plans
• A Step-by-Step Guide to Presenting Your Business Plan in 10 Slides
• 6 Tips for Making a Winning Business Presentation
• 12 Ways to Set Realistic Business Goals and Objectives
• 3 Key Things You Need to Know About Financing Your Business
• How to Perfectly Pitch Your Business Plan in 10 Minutes
• How to Fund Your Business Through Friends and Family Loans and Crowdsourcing
• How to Fund Your Business Using Banks and Credit Unions
• How to Fund Your Business With an SBA Loan
• How to Fund Your Business With Bonds and Indirect Funding Sources
• How to Fund Your Business With Venture Capital
• How to Fund Your Business With Angel Investors
• How to Use Your Business Plan to Track Performance
• How to Make Your Business Plan Attractive to Prospective Partners
• Is This Idea Going to Work? How to Assess the Potential of Your Business.
• When to Update Your Business Plan
• How to Write the Management Team Section to Your Business Plan
• How to Create a Strategic Hiring Plan
• How to Write a Business Plan Executive Summary That Sells Your Idea
• How to Build a Team of Outside Experts for Your Business
• Use This Worksheet to Write a Product Description That Sells
• What Is Your Unique Selling Proposition? Use This Worksheet to Find Your Greatest Strength.
• How to Raise Money With Your Business Plan
• Customers and Investors Don't Want Products. They Want Solutions.
• 5 Essential Elements of Your Industry Trends Plan
• How to Identify and Research Your Competition
• Who Is Your Ideal Customer? 4 Questions to Ask Yourself.
• How to Identify Market Trends in Your Business Plan
• How to Define Your Product and Set Your Prices
• How to Determine the Barriers to Entry for Your Business
• How to Get Customers in Your Store and Drive Traffic to Your Website
• How to Effectively Promote Your Business to Customers and Investors
• What Equipment and Facilities to Include in Your Business Plan
• How to Write an Income Statement for Your Business Plan
• How to Make a Balance Sheet
• How to Make a Cash Flow Statement
• How to Use Financial Ratios to Understand the Health of Your Business
• How to Write an Operations Plan for Retail and Sales Businesses
• How to Make Realistic Financial Forecasts
• How to Write an Operations Plan for Manufacturers
• What Technology Needs to Include In Your Business Plan
• How to List Personnel and Materials in Your Business Plan
• The Role of Franchising
• The Best Ways to Follow Up on a Buisiness Plan
• The Best Books, Sites, Trade Associations and Resources to Get Your Business Funded and Running
• How to Hire the Right Business Plan Consultant
• Business Plan Lingo and Resources All Entrepreneurs Should Know
• How to Write a Letter of Introduction
• What To Put on the Cover Page of a Business Plan
• How to Format Your Business Plan
• 6 Steps to Getting Your Business Plan In Front of Investors

How to Use Financial Ratios to Understand the Health of Your Business Comparing various elements of your financial reports will help you manage your company better and show investors that you are on the right track.

By Eric Butow • Oct 27, 2023

Opinions expressed by Entrepreneur contributors are their own.

This is part 5 / 11 of Write Your Business Plan: Section 5: Organizing Operations and Finances series.

Everything in business is relative. The numbers for your profits, sales, and net worth need to be compared with other components of your business for them to make sense. For instance, a $1 million net profit sounds great. But what if it took sales of $500 million to achieve those profits? That would be a modest performance indeed.

To help understand the relative significance of your financial numbers, analysts use financial ratios. These ratios compare various elements of your financial reports to see if the relationships between the numbers make sense based on prior experience in your industry.

Related: Financial Ratios Are How You Know If What You're Doing Is Working

Some of the common ratios and other calculations analysts perform include your company's break-even point, current ratio, debt-to-equity ratio, return on investment, and return on equity. You may not need to calculate all of these. Depending on your industry, you may also find it useful to calculate various others, such as inventory turnover, a useful figure for many manufacturers and retailers. But ratios are highly useful tools for managing, and most are quick and easy to figure out. Becoming familiar with them and presenting the relevant ones in your plan will help you manage your company better and convince investors you are on the right track.

There are four kinds of financial ratios: liquidity ratios like the current ratio, asset management ratios like the sales/receivable cycle, debt management ratios like the debt-to-equity ratio, and profitability ratios like return on investment.

Break-Even Point

One of the most important calculations you can make is figuring your break-even point. This is the point at which revenue equals costs. Another way to figure it is to say it's the level of sales you need to get to for gross margin or gross profit to cover all your fixed expenses. Knowing your break-even point is important because when your sales are over this point, they begin to produce profits. When your sales are under this point, you're still losing money. This information is handy for all kinds of things, from deciding how to price your product or service to figuring whether a new marketing campaign is worth the investment.

Related: How to Write an Income Statement for Your Business Plan

The process of figuring your break-even point is called break-even analysis. It may sound complicated, and if you were to watch an accountant figure your break-even point, it would seem like a lot of mumbo-jumbo. Accountants calculate figures with all sorts of arcane-sounding labels, such as variable cost percentage and semi-fixed expenses. These numbers may be strictly accurate, but given all the uncertainty there is with projecting your break-even point, there's some question as to whether extra accuracy is worth all that much.

There is, however, a quicker if somewhat dirtier method of figuring break-even. It is described in the below worksheet. Although this approach may not be up to accounting school standards, it is highly useful for entrepreneurs, and more importantly, it can be done quickly, easily, and frequently as conditions change.

Related: Tips and Strategies for Using the Balance Sheet as Your Franchise Scorecard

Once you get comfortable with working break-even figures in a simple fashion, you can get more complicated. You may want to figure break-even points for individual products and services. Or you may apply break-even analysis to help you decide whether an advertising campaign is likely to pay any dividends. Perform break-even analyses regularly and often, especially as circumstances change. Hiring more people, changing your product mix, or becoming more efficient all change your break-even point.

Break Even Worksheet

To determine your break-even point, start by collecting these two pieces of information:

1. Fixed costs. These are inflexible expenses you'll have to make independently of sales volume. Add up your rent, insurance, administrative expenses, interest, office supply costs, maintenance fees, and so on to get this number. Put your fixed costs here: ______________________.

2. Average gross profit margin. This will be the average estimated gross profit margin, expressed as a percentage, that you generate from sales of your products and services. Put your average gross profit margin here: ______________________.

Now divide the costs by profit margin, and you have your break-even point. Here's the formula:

Fixed costs / Profit Margin = Break-even point

If, for instance, your fixed costs were $10,000 a month and your average gross profit margin was 60 percent, the formula would look like this:

$10,000 / .6 = $16,667

So in this case, your break-even point is $16,667. When sales are running at $16,667 a month, your gross profits are covering expenses. Fill your own numbers into the following template to figure your break-even point:

$________________/________________= $________________

Related: How to Calculate Your Net Worth and Grow Your Wealth

Current Ratio

The current ratio is an important measure of your company's short-term liquidity. It's probably the first ratio anyone looking at your business will compute because it shows the likelihood that you'll be able to make it through the next twelve months.

Figuring your current ratio is simple. You divide current assets by current liabilities. Current assets consist of cash, receivables, inventory, and other assets likely to be sold for cash in a year. Current liabilities consist of bills that will have to be paid before 12 months pass, including short-term notes, trade accounts payable, and the portion of long-term debt due in a year or less. Here's the formula:

Current assets / Current ratio = Current liabilities

For example, say you have $50,000 in current assets and $20,000 in current liabilities. Your current ratio would be:

$50,000 / 2.5 = $20,000

The current ratio is expressed as a ratio: 2.5 to 1, or 2.5:1. That's an acceptable current ratio for many businesses. Anything less than 2:1 is likely to raise questions.

Related: How to Make Realistic Financial Forecasts

Quick Ratio

This ratio has the best name—it's also called the acid-test ratio. The quick ratio is a more conservative version of the current ratio. It works the same way but leaves out inventory and any other current assets that may be a little harder to turn into cash. You'll normally get a lower number with this one than with the current ratio—1:1 is acceptable in many industries.

Sales/Receivables Ratio

This ratio shows how long it takes you to get the money owed you. It's also called the average collection period and receivables cycle, among other names. Like most of these ratios, there are various ways of calculating your sales/receivables cycle, but the simplest is to divide your average accounts receivable by your annual sales figure and multiply it by 360, which is considered to be the number of days in the year for many business purposes. Like this:

Receivables x 360 = Sales

If your one-person consulting business had an average of $10,000 in outstanding receivables and was doing about $120,000 a year in sales, here's how you'd calculate your receivables cycle:

$10,000 x 12 = $120,000 1/12x360=30

If you divide one by twelve on a calculator, you'll get .08333, which gives you the same answer, accounting for rounding. Either way, your average collection period is thirty days. This will tell you how long, on average, you'll have to wait to get the check after sending out your invoice. Receivables will vary by customer, of course. You should also check the receivables cycle number against the terms under which you sell. If you sell on thirty-day terms and your average collection period is forty days, there may be a problem that you need to attend to, such as customer dissatisfaction, poor industry conditions, or simply lax collection efforts on your part.

Related: The Facts About Financial Projections

Inventory Turnover

Retailers and manufacturers need to hold inventory, but they don't want to hold any more than they have to because interest, taxes, obsolescence, and other costs eat up profits relentlessly. To find out how good they are at turning inventory into sales, they look at inventory turnovers.

The inventory-turnover ratio takes the cost of goods sold (better known by the acronym COGS) and divides it by inventory. The COGS figure is a total for a set period, usually a year. The inventory is also an average for the year; it represents what that inventory costs you to obtain, whether by building it or by buying it.

Average COGS / Average inventory = Inventory turnover

An example:

$500,000 / 4 = $125,000

In this example, the company turns over inventory four times a year. You can divide that number into 360 to find out how many days it takes you to turn over inventory. In this case, it would be every ninety days.

It's hard to say what is considered to be a good inventory-turnover figure. A low figure suggests you may have too much money sitting around in the form of inventory. You may have slow-moving inventory that should be marked down and sold. A high number for inventory turnover is generally better.

Related: How to Measure Franchise Success With Your Income Statement

Debt-to-Equity Ratio

This ratio is one that investors will scrutinize carefully. It shows how heavily in debt you are compared with your total assets. It's figured by dividing total debt, both long- and short-term liabilities, by total assets.

Total debt / Debt-to-equity ratio = Total assets

Here's a sample calculation:

$50,000 / 1:2 = $100,000

You want this number to be low to impress investors, especially lenders. A debt-to-equity ratio of 1:2 would be comforting for most lenders. One way to raise your debt-to-equity ratio is by investing more of your own cash in the venture.

Related: ROI Isn't Everything — Don't Overlook These 6 'Immeasurable' Metrics That Define Business Success

Profit on Sales

Profit on sales, abbreviated as POS, is your ground-level profitability indicator. Take your net profit before taxes figure and divide it by sales.

Profit / Sales = Profit on Sales

For example, if your restaurant earned $100,000 last year on sales of

$750,000, this is how your POS calculation would look:

$100,000 / $750,000 = 0.133

Is 0.133 good? That depends. Like most of these ratios, a good number in one industry may be lousy in another. You need to compare POS figures for other restaurants to see how you did.

Return on Equity

Return on equity, often abbreviated as ROE, shows you how much you're getting out of the company as its owner. You figure it by dividing net profit from your income statement by the owner's equity figure—the net worth figure if you're the only owner—from your balance sheet.

Net profit / Net worth = Return on equity

Related: Eight (Non-Traditional) Strategic Accounting Secrets To Profitable Restaurants In 2023

Return on Investment

Your investors are interested in the return on investment, or ROI, that your company generates. This number, figured by dividing net profit by total assets, shows how much profit the company is returning based on the total investment in it.

Net profit / Total assets = Return on investment For example, it might look like this:

$2,589 / $47,017 = 5.5%

Accounting Through the Ages

If you don't understand accounting as well as you should, you can't blame it on recent innovations. Double-entry accounting dates at least from 1340, and the first book on accounting, by a monk named Luca Pacioli, was published in 1494.

Surprisingly, a medieval accountant would feel quite comfortable with much of what goes on today in an accounting department. But accountants haven't been sitting back and relaxing during the intervening centuries. They've thought up all kinds of ways to measure the health and wealth of businesses (and businesspeople).

Related: How to Use Your Business Plan to Track Performance

There are more ratios, analyses, and calculations than you can shake a green eyeshade at. And wary investors are prone to using a wide variety of those tests to make sure they're not investing in something that went out of style around the time Columbus set sail. So, although accounting may not be your favorite subject, it's a good idea to learn what you can. Otherwise, you're likely to be seen as not much more advanced than a fifteenth-century monk.

Buzzword: Liquidity

Liquidity measures your company's ability to convert its noncash assets, such as inventory and accounts receivable, into cash. Essentially, it measures your ability to pay your bills.

Buzzword: Leverage

Leverage refers to the use of borrowed funds to increase your purchasing power. Used wisely, leverage can boost your profitability. Overused, however, borrowing costs can eradicate operating earnings and produce devastating net losses.

Related: How to Make a Cash Flow Statement

More in Write Your Business Plan

Section 1: the foundation of a business plan, section 2: putting your business plan to work, section 3: selling your product and team, section 4: marketing your business plan, section 5: organizing operations and finances, section 6: getting your business plan to investors.

Successfully copied link

Home » Explanations » Financial statement analysis » Current ratio

Current ratio

Current ratio  (also known as  working capital ratio ) is a popular tool to evaluate short-term solvency position of a business. Short-term solvency refers to the ability of a business to pay its short-term obligations when they become due. Short term obligations (also known as current liabilities ) are the liabilities payable within a short period of time, usually one year.

A higher current ratio indicates strong solvency position of the entity in question and is, therefore, considered better.

Current ratio is computed by dividing total current assets by total current liabilities of the business. This relationship can be expressed in the form of following formula or equation:

Above formula comprises of two components i.e., current assets and current liabilities. Both of these components should be available from the entity’s balance sheet . Some examples of current assets and current liabilities are listed below:

Some common examples of current assets are given below:

• Marketable securities
• Accounts receivables/debtors
• Inventories/stock
• Bills receivable
• Short-term totes receivable
• Prepaid expenses

Some common examples of current liabilities are given below:

• Accounts payable/creditors
• Bills payable
• Short-term notes payable
• Short term bonds payable
• Interest payable
• Unearned revenues
• current portion of long term debt

On December 31, 2016, the balance sheet of Marshal company shows the total current assets of $1,100,000 and the total current liabilities of $400,000. Your are required to compute current ratio of the company.

Current ratio = Current assets/Current liabilities = $1,100,000/$400,000 = 2.75 times

The current ratio is 2.75 which means the company’s currents assets are 2.75 times more than its current liabilities.

Significance and interpretation

Current ratio is a useful test of the short-term-debt paying ability of any business. A ratio of 2:1 or higher is considered satisfactory for most of the companies but analyst should be very careful while interpreting it.  Simply computing the ratio does not disclose the true liquidity of the business because a high current ratio may not always be a green signal. It requires a deep analysis of the nature of individual current assets and current liabilities. A company with high current ratio may not always be able to pay its current liabilities as they become due if a large portion of its current assets consists of slow moving or obsolete inventories. On the other hand, a company with low current ratio may be able to pay its current obligations as they become due if a large portion of its current assets consists of highly liquid assets i.e., cash, bank balance, marketable securities and fast moving inventories. Consider the following example to understand how the composition and nature of individual current assets can differentiate the liquidity position of two companies having same current ratio figure.

Liquidity comparison of two or more companies with same current ratio

We may find situations where two or more companies have the same current ratio figures but their real liquidity position is far different from each other. It happens because of the quality and nature of individual items that make up the total current assets of the companies. Consider the following example to understand this point in more detail:

The following data has been extracted from the financial statements of two companies – company A and company B.

Both company A and company B have the same current ratio (2:1). Do both the companies have equal ability to pay its short-term obligations? The answer to this question is a “no” because company B is likely to have difficulties in paying its short-term obligations. Most of its current assets consist of inventory which might not be quickly convertible into cash. The company A, on the other hand, is likely to pay its current obligations as and when they become due because a large portion of its current assets consists of cash and receivables. Accounts receivable are generally considered more liquid assets in nature and thereby have a better chance to be quickly converted into cash than inventories.

The above analysis reveals that the two companies might actually have different liquidity positions even if both have the same current ratio number. While determining a company’s real short-term debt paying ability, an analyst should therefore not only focus on the current ratio figure but also consider the composition of current assets.

Limitations of current ratio

Current ratio suffers from a number of considerable limitations and, therefore, can’t be applied as the sole index of liquidity. Some major limitations are given below:

1. Different ratio in different parts of the year:

The volume and frequency of trading activities have high impact on the entities’ working capital position and hence on their current ratio number. Many entities have varying trading activities throughout the year due to the nature of industry they belong. The current ratio of such entities significantly alters as the volume and frequency of their trade move up and down. In short, these entities exhibit different current ratio number in different parts of the year which puts both usability and reliability of the ratio in question.

2. Issues in inter-firm comparison:

Financial ratios are often made part of inter-firm comparison – a comparison of operating performance and financial status of two or more similar commercial entities working in the same industry, primarily conducted to learn and achieve a better business performance. To compare the current ratio of two companies, it is necessary that both of them use the same inventory valuation method. For example, comparing current ratio of two companies would be like comparing apples with oranges if one uses FIFO while other uses LIFO cost flow assumption for costing/valuing their inventories. The analyst would, therefore, not be able to compare the ratio of two companies even in the same industry.

3. Just a test of quantity, not quality:

Current ratio is a number which simply tells us the quantity of current assets a business holds in relation to the quantity of current liabilities it is obliged to pay in near future. Since it reveals nothing in respect of the assets’ quality, it is often regarded as crued ratio. For example, an entity with a favorable current ratio may still be at liquidity risk if it currently lacks on cash to settle its short-term liabilities and a bigger portion of its total current assests is composed of work in process inventories and slow moving stocks which generally require a longer period of time to bring cash in business.

4. Window dressing and manipulation:

Current ratio can be easily manipulated by equal increase or equal decrease in current assets and current liabilities numbers. For example, if current assets of a company are $10,000 and current liabilities are $5,000, the current ratio would be 2 : 1 as computed below:

$10,000 : $5,000 = 2 : 1

Now If both current assets and current liabilities are reduced by $1,000, the ratio would be increased to 2.25 : 1 as computed below:

$9,000 : $4,000 = 2.25 : 1

Similarly if we increase both the elements by $1,000, the ratio would be decreased to 1.83 : 1 as computed below:

$11,000 : $6,000 = 1.83 : 1

However in order to minimize the impact of above mentioned limitations and to conduct a meaningful and reliable liquidity analysis of a business, the current ratio can be used in conjunction with many other ratios like inventory turnover ratio , receivables turnover ratio , average collection period , current cash debt coverage ratio , and quick ratio etc. These ratios are helpful in testing the quality and liquidity of a number of individual current assets and together with current ratio can provide much better insights into the company’s short-term financial solvency.

Computating current assets or current liabilities when the ratio number is given

Students may come across examination questions or home work problems in which the examiner or tutor provideds a current ratio number along with some additional information pertaining to a business entity and asks them to work out either total current assets or total current liabilities figure. For example, he may provide current ratio and one of the total current assets or total current liabilities figure and ask the students to calculate the other one. There is no difficulty involved in computations like this, because we can work out either of the two figures just by rearranging the components of formula given above. Consider the two examples given below:

T & D company’s current ratio is 2.5 for the most recent period. If total current assets of the company are $7,500,000, what are total current liabilities?

Current ratio = Current assets/Current liabilities or Current liabilities = Current assets/Current ratio = $7,500,000/2.5 = $3,000,000

If Marbel Inc’s current ratio is 1.4 and total current liabilities are $8,000,000, what are its total current assets?

Current ratio = Current assets/Current liabilities or Current assets = Current liabilities × Current ratio = $8,000,000 × 1.4 = $11,200,000

Leave a comment Cancel reply

Final dates! Join the tutor2u subject teams in London for a day of exam technique and revision at the cinema. Learn more →

Reference Library

Collections

• See what's new
• All Resources
• Student Resources
• Assessment Resources
• Teaching Resources
• CPD Courses
• Livestreams

Study notes, videos, interactive activities and more!

Business news, insights and enrichment

Currated collections of free resources

Browse resources by topic

• All Business Resources

Resource Selections

Currated lists of resources

Study Notes

Current Ratio

Last updated 22 Mar 2021

• Share on Facebook
• Share on Twitter
• Share by Email

What is the current ratio?

The current ratio is one of two main liquidity ratios which are used to help assess whether a business has sufficient cash or equivalent current assets to be able to pay its debts as they fall due. In other words, the liquidity ratios focus on the solvency of the business. A business that finds that it does not have the cash to settle its debts becomes insolvent.

Liquidity ratios focus on the short-term and make use of the current assets and current liabilities shown in the balance sheet.

The current ratio is a simple measure that estimates whether the business can pay debts due within one year out of the current assets. A ratio of less than one is often a cause for concern, particularly if it persists for any length of time.

A current ratio of between 1.0-3.0 is pretty encouraging for a business. It suggests that the business has enough cash to be able to pay its debts, but not too much finance tied up in current assets which could be reinvested or distributed to shareholders.

A low current ratio of less than 1.0 might suggest that the business is not well placed to pay its debts. It might be required to raise extra finance or extend the time it takes to pay creditors. However, this very much depends on the nature of the business. When evaluating the current ratio, it is important to compare with key competitors and industry averages for a better perspective on the strength or weakness of the number.

Perhaps more significant would be a sharp decline in the current ratio from one period to the next, which may indicate liquidity issues.

If you would like to learn more about this topic then have a look at out key topic video!

• Current ratio
• Current liabilities
• Current assets
• Liquidity ratios

You might also like

Liquidity ratios (revision presentation).

Teaching PowerPoints

Handling cash flow problems

Improving cash flow, causes of cash flow problems, raising finance (revision presentation), balance sheet (revision presentation), sources of finance - bank overdrafts and bank loans, managing finance - cash flow objectives, our subjects.

• › Criminology
• › Economics
• › Geography
• › Health & Social Care
• › Psychology
• › Sociology
• › Teaching & learning resources
• › Student revision workshops
• › Online student courses
• › CPD for teachers
• › Livestreams
• › Teaching jobs

Boston House, 214 High Street, Boston Spa, West Yorkshire, LS23 6AD Tel: 01937 848885

• › Contact us
• › Terms of use
• › Privacy & cookies

© 2002-2024 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.

Wise sheets Blog

How can a company improve its current ratio.

• December 12, 2023

Guillermo Valles

In the complex world of business finance, the current ratio stands out as a crucial indicator of a company's short-term financial health. It's a simple yet powerful tool that gives stakeholders a snapshot of how well a company can meet its short-term obligations with its short-term assets. This metric not only influences day-to-day operations but also shapes investor confidence and creditworthiness.

But what happens when a company's current ratio isn't up to par? How can it navigate through the choppy waters of financial management to improve this vital statistic? This article delves deep into practical, effective strategies to enhance a company's current ratio. Whether you're a seasoned financial expert or a budding entrepreneur, understanding how to optimize this ratio is essential for steering your company towards sustained financial health and growth.

What is the Current Ratio?

Definition and calculation, interpreting the current ratio.

• Example Calculation: Apple's Current Ratio in 2022

Why It Matters

The current ratio , a cornerstone of financial analysis, is a key indicator of a company's liquidity. Simply put, it measures a company's ability to pay off its short-term liabilities with its short-term assets. This ratio is a critical component of financial health, providing insights into a company's operational efficiency and financial stability.

The current ratio is calculated by dividing a company's current assets by its current liabilities. The formula is:

Current Ratio = Current Assets / Current Liabilities

Current assets include: cash, cash equivalents, marketable securities, inventory, and accounts receivable — essentially, assets that can be converted into cash within a year.

Current liabilities, on the other hand, comprise obligations the company expects to settle within the same period, such as accounts payable, short-term debt, and other similar liabilities.

A higher current ratio indicates a greater level of liquidity, suggesting that a company is more capable of paying off its short-term obligations without raising additional capital. Typically, a ratio of 1 or above is considered healthy, implying that current assets equal or exceed current liabilities. However, this benchmark can vary across industries.

A ratio significantly above 1 might indicate that a company is not effectively using its short assets or may have too much inventory. Conversely, a ratio below 1 suggests that a company might struggle to meet its short-term obligations, potentially leading to liquidity problems.

Example Calculation: Apple's Current Ratio in 2022

To illustrate the practical application of the current ratio, let's examine a real-world example: Apple Inc. in 2022. This example will help demystify the concept and show how it can be applied to assess the financial health of a major corporation.

Gathering Financial Data

The first step in calculating the current ratio is to obtain the necessary financial data. This information can be found in a company's balance sheet, which is publicly available in its annual report or through financial news and data services. For Apple, we'll look at the figures reported in their 2022 financial statements.

According to Apple's balance sheet for the fiscal year ending in 2022:

• Current Assets: These include cash and cash equivalents, short-term marketable securities, accounts receivable, inventories, and other current assets. Let’s assume the total current assets were valued at $143.566 billion.
• Current Liabilities: These encompass accounts payable, accrued expenses, and other current liabilities. Let’s say the total current liabilities were $145.303 billion.

Calculating the Ratio

Now, we apply the current ratio formula:

Plugging in Apple’s figures:

Current Ratio= $143.566 billion / $145.303 billion

Current Ratio = 0.98

Interpreting the Result

With a current ratio of approximately 0.99, Apple demonstrates a nearly balanced liquidity position in this example. This ratio indicates that for every dollar of its short-term liabilities, Apple has almost an equal amount in short-term assets. While this ratio is slightly below the ideal benchmark of 1, it still suggests that the company is almost able to cover its short-term obligations with its current assets. This close to 1:1 ratio points towards a reasonable level of financial stability, although it also suggests there could be room for improvement in managing its working capital more efficiently. Such a ratio, especially for a large and established company like Apple, often reflects a nuanced balance between maintaining sufficient liquidity and efficient use of assets.

Automatic Current Ratio Calculation

Instead of manually calculating the current ratio as well as hundreds of other financial numbers and metrics , you can get them all automatically on your spreadsheet using Wisesheets .

You can easily build custom stock screeners like this:

Or build custom-made stock analysis models and get the metric granularly. For example, to get the current ratio for Microsoft in 2022, all you need to do is enter =WISE("msft", "current ratio", 2022).

This allows you to build complex models that provide you with all the data you need for your stock analysis very quickly.

Get your free trial here.

Understanding the current ratio is vital for several reasons:

• Risk Assessment : It helps investors and creditors assess the risk of investing or lending to a company.
• Operational Insight : It provides a snapshot of how well a company manages its working capital.
• Comparative Analysis : It allows for comparison with industry benchmarks and competitors, offering a perspective on a company's relative financial health.

The current ratio is not just a number but a reflection of a company’s financial agility. As we proceed, we will explore the nuances of this ratio and the strategies to optimize it, ensuring that your company not only survives but thrives in the competitive business environment.

Improving a company's current ratio is crucial for enhancing its financial stability and attractiveness to investors and creditors. A healthy current ratio indicates a company's proficiency in managing its working capital and its ability to meet short-term obligations. Here, we explore various strategies that companies can adopt to improve this key financial metric.

1. Increasing Current Assets

• Enhance Receivables Collection : Implementing more efficient accounts receivable management can speed up cash inflow. This includes tightening credit terms, offering discounts for early payments, and using automated reminder systems for overdue accounts.
• Optimize Inventory Levels : Reducing excess inventory can free up cash and increase current assets. Techniques like Just-in-Time (JIT) inventory management can be highly effective.
• Diversify Revenue Streams : Exploring new revenue channels can boost current assets. This could involve launching new products or services or expanding into new markets.

2. Reducing Current Liabilities

• Extend Payment Terms with Suppliers : Negotiating longer payment terms with suppliers can defer outflows, reducing current liabilities.
• Restructure Short-term Debt : Refinancing short-term debt into long-term liabilities can improve the current ratio, although this should be approached with caution to avoid long-term financial strain.
• Control Expenditures : Reducing unnecessary expenses and controlling operational costs can also help in lowering current liabilities.

3. Balanced Approach to Assets and Liabilities

• Regular Monitoring : Consistently tracking the current ratio allows for timely adjustments in strategy.
• Sustainable Financial Practices : Encouraging a culture of financial discipline within the organization can ensure that both assets and liabilities are managed wisely.

4. Leveraging Financial Tools and Technology

• Use of Financial Software : Implementing financial management software can provide real-time insights into the company's financial status, helping in making informed decisions.
• Data-Driven Decision Making : Utilizing data analytics can aid in predicting cash flow trends and making strategic decisions to maintain a healthy current ratio.

We've seen how increasing current assets, reducing current liabilities, and maintaining a balanced approach to managing assets and liabilities can significantly improve a company's current ratio. The strategies outlined here, from optimizing receivables and inventory management to restructuring debts and leveraging financial tools, are not just theoretical concepts but practical steps that can lead to tangible improvements in a company's financial health.

It's important to remember that the goal of improving the current ratio is not just to hit a target number but to foster a sustainable, financially sound business environment. A healthy current ratio is a sign of a company's resilience, efficiency, and attractiveness to investors and creditors. It speaks volumes about a company’s capability to navigate the ebbs and flows of business cycles and emerge as a robust, dependable, and thriving entity.

Hello! I'm a finance enthusiast who fell in love with the world of finance at 15, devouring Warren Buffet's books and streaming Berkshire Hathaway meetings like a true fan.

I started my career in the industry at one of Canada's largest REITs, where I honed my skills analyzing deals and learning the ropes.

My passion led me to the stock market, but I quickly found myself spending more time gathering data than analyzing companies. That's when my team and I created Wisesheets, a tool designed to automate the stock data gathering process, with the ultimate goal of helping anyone quickly find good investment opportunities.

Today, I juggle improving Wisesheets and tending to my stock portfolio, which I like to think of as a garden of assets and dividends. My journey from a finance-loving teenager to a tech entrepreneur has been a thrilling ride, full of surprises and lessons.

I'm excited for what's next and look forward to sharing my passion for finance and investing with others!

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Save my name, email, and website in this browser for the next time I comment.

Related Posts

Yahoo Finance Excel (Live & Historical Stock Data Guide)

Yahoo Finance is a great tool for accessing financial news and stock data. The

Yahoo Finance API and Alternatives (Code and No Code)

Yahoo Finance is one of the most frequently used sources of news and stock

What Is Net Income Growth, and How to Calculate It

If you're an investor, you'll want to know about net income growth and how

Better stock investments one article a time

Www.wisesheets.io, wisesheets inc. 2023 - all rights reserved.

Current Ratio Calculator

Table of contents

The current ratio calculator is a simple tool that allows you to calculate the value of the current ratio, which is used to measure the liquidity of a company. Note that sometimes, the current ratio is also known as the working capital ratio, so don't be misled by the different names! In the text below, we will explain to you what is a current ratio.

In addition, this article should also help you answer the following questions:

• What is a current ratio formula?
• How to calculate a current ratio?
• What is a good current ratio?

Be sure also to visit the Sortino ratio calculator that indicates the return of an investment considering its risk.

What is a current ratio?

The current ratio is one of the most popular liquidity ratios. It measures a company's ability to cover its short-term obligations (liabilities that are due within a year) with current assets. To assess this ability, the current ratio compares the current total assets of a company to its current total liabilities.

Wait a minute, what are assets and liabilities?

Assets are all that a company owns. It can include patents, production equipment, inventories, etc. Liabilities are all that a company owes. It can be trade debts, workers' wages, taxes, and dividends. Companies have current and non-current assets/liabilities. The current ones mean they can become cash or be paid in less than a year, respectively.

The current ratio, therefore, is called "current" because, in contrast to other liquidity ratios, it incorporates all current assets (both liquid and illiquid) and liabilities.

The simple intuition that stands behind the current ratio is that the company's ability to fulfill its obligations depends on the value of its current assets.

The current ratio formula

The value of the current ratio is calculated by dividing current assets by current liabilities. More precisely, the general formula for the current ratio is:

current_ratio = current assets / current_liabilities

Note that the value of the current ratio is stated in numeric format, not in percentage points. You can obtain the exact values of particular factors of this equation from the company's annual report (balance sheet).

How to calculate a current ratio with our calculator?

If you don't know how to calculate the current ratio, try to follow these instructions:

First of all, you have to check the financial statement of the analyzed company.

In the balance sheet prepared in accordance with the IFRS ( International Financial Reporting Standards ), in the part concerning assets, find the position named “Current Assets.”

Then, in the “Liabilities and Equity” part, find the position “Current Liabilities.”

Fill in the appropriate fields in our calculator and simply obtain the value of the current ratio.

You can find out more about the interpretation of the calculated value in the next section of the article.

Example of current ratio calculation

Look at this example of current ratio calculation.

The owner of Mama's Burger Restaurant is applying for a loan to finance the extension of the facility. To estimate the credibility of Mama's Burger, the bank wants to analyze its current financial situation. One of the considered indicators is the current ratio.

The value of current assets in the restaurant's balance sheet is $40,000, and the current liabilities are $200,000.

It means that the current ratio is 0.2.

As it is significantly lower than the desirable level of 1.0 (see the paragraph What is a good current ratio? ), it is unlikely that Mama's Burger will get the loan.

What is a good current ratio (working capital ratio)?

The interpretation of the value of the current ratio (working capital ratio) is quite simple.

It expresses the proportion of a company's current assets to its current liabilities. To give an example: a current ratio equal to 3 means that the company has 3 times more current assets than current liabilities.

Very often, people think that the higher the current ratio, the better. This is based on the simple reasoning that a higher current ratio means the company is more solvent and can meet its obligations more easily.

However, you have to know that a high value of the current ratio is not always good for investors. A disproportionately high current ratio may point out that the company uses its current assets inefficiently or doesn't use the opportunities to gain capital from external short-term financing sources. If so, we could expect a considerable drawdown in future earnings reports (check the maximum drawdown calculator for more details).

Generally, it is agreed that a current ratio of less than 1.0 may indicate insolvency. However, it depends on the particular situation. Sometimes, even though the current ratio is less than one, the company may still be able to meet its obligations. You have to know that acceptable current ratios vary from industry to industry.

So it is always wise to compare the obtained current ratio to that of other companies in the same branch of industry. Moreover, it is desirable to identify the trend of the current ratio. Its decreasing value over time may be one of the first signs of the company's financial troubles (insolvency).

The current ratio vs. the quick ratio

The current ratio may be confused with the quick ratio (acid ratio). We have covered the latter topic more in detail in the quick ratio calculator

Both of these indicators are applied to measure the company's liquidity, but they use different formulas. In the numerator, the current ratio takes into account all current assets while the numerator of the quick ratio considers only assets that are liquid (cash and cash equivalent, marketable securities, accounts receivable).

It is worth knowing that the current ratio is simpler to calculate, but sometimes it is less helpful than the quick ratio because it doesn't make a distinction between the liquidity of different types of assets.

Another great investing calculators

If you are interested in corporate finance, you may also try our other useful calculators. Particularly interesting may be the return on equity calculator and the return on assets calculator .

Besides, you should analyze the stock's Sortino ratio and verify if it has an acceptable risk/reward profile.

Finally, if stock picking is not for you, you could try investing in ETFs or in futures markets. Just be careful of margin calls.

Current assets

Current liabilities

Current ratio

How To Increase Current Ratio: Improve Liquidity For Business

Dec 23, 2021.

How liquid is your business? The answer lies in a metric called the current ratio, also known as the working capital ratio, which indicates your ability to repay short-term debts in the next 12 months. Keeping an eye on this number can help you gauge the company’s financial health as you increase liquidity. By taking steps to improve the current ratio, you increase liquidity and raise the business’ standing in the eyes of lenders, investors, and other stakeholders. 

How can a company improve its current ratio? This comprehensive guide to business liquidity gives you strategies that will move the needle in a positive direction.

Defining and calculating the current ratio

Before you learn how to improve current ratio, you have to know how to calculate this number. The formula for a current ratio is simple: Divide the company’s current assets by its current liabilities. In the assets category, be sure to account for:

• Cash and equivalents of cash on hand
• Operating expenses paid in advance
• Current inventory of products, raw materials, and in-progress productions
• Accounts receivables due within the next year
• Investments
• Office supplies
• Debt payments made in advance

Liabilities include all your company’s outstanding debt obligations as well as short-term notes, accrued income taxes and expenses, accrued compensation, and deferred revenues. It also covers the portion of long-term debt due in the next year. 

Let’s look at an example calculation to help you understand how to increase liquidity. If your company has $10 million in assets and $8 million in debts, its current ratio is 10/8 or 1.25. In other words, for every $1 in debt, your company has $1.25 in corresponding assets.

A ratio greater than 1 represents the favorable financial position of having more assets than debts. Conversely, a current ratio lower than 1 means the business’ debts exceed its assets, which can be a red flag for financial danger and signifies that you need to improve liquidity. A ratio higher than 3 could show an inefficient use of working capital.

Current ratio vs. quick ratio

You might also hear about another key metric, the quick ratio. Like the current ratio, the quick ratio measures your company’s short-term liquidity, but it accounts for fewer assets, which creates a more conservative estimate. To find your quick ratio, start with the current ratio equation. For assets, count only accounts receivable, sellable stocks and securities, cash, and cash equivalents. Use the same debts as with the current ratio calculation. If you’re wondering how to improve quick ratio, boosting your current ratio will put you on the right path. 

Improving your company’s current ratio

The ideal current ratio varies by industry, but you should aim to be at or above the average in your sector. Fortunately, smart strategies can change the direction of this number for the better. 

Reconfigure debt

Repaying or restructuring debt will raise the current ratio. Explore whether you can reamortize existing term loans and change how the lender charges you interest, effectively delaying debt payments so they drop off your current ratio. Negotiate longer payment cycles whenever possible. For example, you may be able to shift short-term debt into a long-term loan to reduce its impact on liquidity. 

Enhance asset management

With a sweep account , the company’s cash on hand can earn interest while remaining available for operating expenses. These accounts “sweep” excess cash into an interest-bearing account and return them to your operating account when it’s time to pay bills. 

Consider selling unused capital assets that don’t create a return. This cash infusion increases your short-term assets column, which, in turn, increases the company’s current ratio. Buildings, equipment, vehicles, outdated inventory, and other items that do not bring funds into the business represent liabilities you can convert to cash. 

If outstanding accounts payable have reduced the company’s liquidity, consider amplifying efforts to collect on these debts. Issue invoices as quickly as possible after a purchase. Establish clear payment terms at the outset, including late fees and interest on past-due balances. Conduct a close review of the business’ accounts payable process and look for inefficiencies that delay payments and prevent prompt collections.

Reduce expenses

If possible, cut down on spending to increase current ratio. Review the budget carefully and see where you can reduce line items like marketing, advertising, labor, and services. These indirect costs add up over time and take a big chunk out of your operating assets, but they often go unnoticed. 

At the same time, consider limiting personal draws on the business. By taking these profits out of circulation, you reduce the amount of available operating capital, decreasing your current ratio. The more cash you dedicate to operating the company, the better current ratio you’ll achieve. 

Whenever possible, finance or delay capital purchases that require a significant outlay of cash. Spending your operating funds on major expenses will quickly draw this ratio below 1. 

Keep in mind that the company’s current ratio naturally changes over time as you repay debt and acquire new assets and debts. Now that you know how to improve liquidity, monitoring this number periodically helps you stay on track and illustrates the impact of implementing these strategies.

About the Author:

Jack Sadden is a Partner and co-founder of Valesco Industries and is primarily focused on various initiatives around strategic leadership of the firm, portfolio company performance, and investment origination. He is a graduate of the Florida State University School of Business and is a licensed Certified Public Accountant.

Recent News

Valesco invests in american bedding manufacturers – the second investment out of valesco fund iii, royalties explained: a comprehensive guide to their impact in business, 9 ways to get the right person in the right seat at work, equity investment in small business: sbic vs private equity, navigating the process of selling your business successfully, the essential role of a corporate attorney in business operations, valesco invests in blower application, llc – the first investment out of valesco fund iii, valesco industries successfully exits drug free sport international, a valesco fund ii investment, how to report to a board of directors: what to include, the ultimate coo toolbox: dashboards, reports & beyond, named founder friendly investors 2021 & 2022 by inc..

• Search Search Please fill out this field.
• Building Your Business
• Becoming an Owner
• Business Plans

Is Your Business Healthy? Use Financial Ratios to Find Out

Give your business a quick checkup

Susan Ward wrote about small businesses for The Balance for 18 years. She has run an IT consulting firm and designed and presented courses on how to promote small businesses.

Current Ratio

Total debt ratio, profit margin, applying the ratios, debt-to-equity ratio.

Analyzing business financial ratios allows lenders to see how your business is doing and compare it to other businesses. Ratio analysis also is a useful tool for business owners. Some basic ratio analysis helps you to assess how healthy your business is, diagnose potential problems, and see if your business is doing better or worse over time. The first step is understanding how to calculate different ratios and interpret the results.

The current ratio measures whether or not your business has enough resources to pay its bills over the next 12 months.

Current ratio = Current assets/Current liabilities

Current assets are a category of assets on the balance sheet that represents cash and assets that are expected to be converted into cash within one year. Current liabilities are a category of liabilities on the balance sheet that represent financial obligations that are expected to be settled within one year.

Suppose a business has $8,472 in current assets and $7,200 in current liabilities. Then the current ratio is $8,472/$7200 = 1.18:1.

So for this business, the current ratio gives a clean bill of health. For every dollar in current liabilities, there is $1.18 in current assets, and a current ratio greater than 1.0 generally is good. If you are comparing your current ratio from year to year and it seems abnormally high, you may be carrying too much inventory.

Total debt ratio does exactly what the name suggests: It shows how much your business is in debt. Understanding this ratio is an excellent way to check your business’s long-term solvency.

Total debt ratio = Total debt/Total assets

You can take these numbers from your balance sheet and plug them in. For instance, a business with $22,375 in total assets and $25,000 in total debt would have a total debt ratio of:

$25,000/$22,375 = 1.11:1

This business, then, is $1.11 in debt for every dollar of assets. So for this business, the total debt ratio tells us that this business is not in good health and may become ill. For good health, the total debt ratio should be 1.0 or less.

The lower the debt ratio, the less total debt the business has in comparison to its asset base. On the other hand, businesses with high total debt ratios are in danger of becoming insolvent or going bankrupt. Lenders pay especially close attention to this ratio.

How much net profit your business is producing can be determined by calculating your profit margin.

Profit margin = Net income/Gross sales

If a business’s gross sales are $180,980 and its net income is $42,325, its profit margin is:

$42,325 / $180,980 = 23.4%

So for every dollar in gross sales, this business is generating a little more than 23 cents net profit. Obviously, the higher the profit margin, the better off the business, but the profit margin also is useful to measure how a business is performing over time.

At a glance, you can see whether your business’s net profit has increased, stayed the same, or decreased over last year. And if it’s decreased, you’ll know to take steps to cure the problem, such as better controlling your expenses .

Imagine the ratios in the examples above belonging to a single business, and you can see how just calculating these three ratios can provide a quick health check for your business. The business in the example isn’t at death’s door yet, but it is ailing. While the profit margin and current assets ratio are robust, the total debt ratio shows that the business is carrying too much debt, which will interfere with cash flow if it hasn’t already.

If your business is incorporated, the debt-to-equity ratio is an important measure of the total amount of debt (current and long term liabilities) carried by the business vs. the amount invested by the shareholders.

If a business's total liabilities are $500,000 and the shareholder's equity is $600,000 the debt-to-equity is:

$500,000 / $600,000 = 0.83

In other words, the portion of assets provided by the shareholders is greater than that provided by creditors, which typically is a good sign.

If your business needs debt or equity financing, the debt-to-equity ratio will be closely scrutinized by lenders or investors. The higher the ratio, the higher the risk carried by the business.

Debt-to-equity ratios are benchmarked by industry. Capital-intensive industries such as transportation and utilities tend to have higher ratios (2.0 or more) while industries such as insurance carriers usually have ratios lower than 0.5.

Call Us (877) 968-7147

Most popular blog categories

• Payroll Tips
• Accounting Tips
• Accountant Professional Tips

6 Financial Ratios for Small Business Owners to Live By

As a small business owner, you work hard to make your company successful. When problems come up, you face them head-on to push your business forward. Whether you go an inch or a mile, you record all your financial moves in your small business online accounting  records.

If you simply write down your transactions, you could miss key information about your financial fitness. You need financial ratios to measure your momentum.

Why look at financial ratios for small business?

Financial ratios help make sense of your accounting information. Ratios show you what aspects of your business are efficient (and what’s not working) by comparing figures.

Ratios compare your present conditions to past performance. They help you identify your gains and weaknesses. By looking at trends in your strengths and shortcomings, you can improve business operations.

Financial ratios also compare you to other companies in your industry, so you can see how you stack up against your competitors. Lenders look at ratios when you apply for a loan.

Statements to use

Many ratios come from two financial statements : the balance sheet and the income statement.

• The balance sheet shows your business’s net value. It includes your assets, liabilities, and equity.
• The income statement includes all the money coming in and out of your business. It shows how you use assets and liabilities.

Learn what financial statements can do for your business, how to create them, and more.

Small business financial ratios

Take a look at the following six financial ratios to use in your business.

1. Common size ratio

The common size ratio helps you compare one aspect of your accounting to the big picture of your finances. You calculate each line item as a percentage of the total amount on the statement.

Common Size Ratio = Line Item / Total

Common size ratio for cash is 2.5% because:

$500 cash / $20,000 total = 0.025

0.025 X 100 = 2.5%

You can use the common size ratio with your balance sheet or income statement. For example, you can find the percentage of assets you have on the balance sheet. You can see your business’s percentage of sales made on the income statement.

2. Current ratio

A current ratio shows your present financial strength. It represents how many times bigger your current assets are compared to your current liabilities . This is also called a working capital ratio.

Current Ratio = Total Current Assets to Total Current Liabilities

Current ratio is 2 to 1 because:

$20,000 current assets to $10,000 current liabilities = 2 to 1

A 2 to 1 ratio is healthy for your business. This means you have twice as many assets as liabilities.

3. Quick ratio

A quick ratio shows if you can meet financial obligations, even if something unexpected happens. For example, if you own a floral shop, would you be able to handle unanticipated maintenance costs on your delivery truck?

Quick Ratio = (Total Current Assets – Total Current Inventory) / Total Current Liabilities

Quick ratio is 0.5 because:

($20,000 current assets – $15,000 current inventory ) / $10,000 current liabilities = 0.5

A healthy quick ratio is 1.0 or more.

4. Inventory turnover ratio

An inventory turnover ratio reveals the how frequently you convert inventory into sales. It shows how much product is sold and how efficiently you manage inventory.

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Inventory turnover ratio is 1.16 because:

$1,750 cost of goods sold / $1,500 average inventory = 1.16

The greater the inventory turnover ratio, the more frequently inventory converts into cash. A greater inventory turnover ratio is good for business because it reflects greater sales.

5. Debt-to-worth ratio

The debt-to-worth ratio shows how dependent you are on borrowed finances compared to your own funding. It compares how much you owe to how much you own. What is business net worth and total liabilities for your company? You’ll need to know these figures before calculating your debt-to-worth ratio.

Debt-to-Worth Ratio = Total Liabilities / Net Worth

Debt-to-worth ratio is 1 because:

Note: Net worth = Assets – Liabilities

$10,000 total liabilities / ($20,000 – $10,000 net worth ) = 1

If the debt-to-worth ratio is greater than 1, your business has more capital from lenders than you. If you are trying to get an SBA loan, or any loan for that matter, the bank might see this as a risk.

6. ROI (return on investment)

ROI compares the amount of money an investment brings into your business to how much you paid for the investment. This ratio shows the money you invest and the profit you get back from it.

ROI = (Earnings – Initial Cost of Investment) / Initial Cost of Investment

ROI is 1.67 because:

($20,000 earnings – $7,500 initial investment ) / $7,500 initial investment = 1.67

The higher your ROI, the more your investments turn into income.

Financial ratios for your small business

The numbers in your accounting books tell a story. They show where you’ve been and suggest where you’re headed. Using ratios to compare financial numbers helps your business recognize successes and solve problems.

Do you need an easy way to record your transactions? Make your life easier by trying our small business accounting software to track finances today. We offer free USA-based support.

This article has been updated from its original publication date of February 18, 2016.

Stay up to date on the latest accounting tips and training

You may also be interested in:

Need help with accounting? Easy peasy.

Business owners love Patriot’s accounting software.

But don’t just take our word…

Explore the Demo! Start My Free Trial

Relax—run payroll in just 3 easy steps!

Get up and running with free payroll setup, and enjoy free expert support. Try our payroll software in a free, no-obligation 30-day trial.

Relax—pay employees in just 3 steps with Patriot Payroll!

Business owners love Patriot’s award-winning payroll software.

Watch Video Demo!

Watch Video Demo

Plan Projections

ideas to numbers .. simple financial projections

Home > Financial Projections > Current Ratio Formula

Current Ratio Formula

Liquidity is the ability of a business to utilize its short term assets (cash, accounts receivable and inventories) to meet its short term liabilities as they fall due. To this end the financial projections template uses the current ratio as an indicator of the liquidity of the business.

If the value is greater than one it shows that current assets are larger than current liabilities and indicates that the business should be able to convert its short term assets (cash, inventory, accounts receivable) into cash and pay its short term liabilities (accounts payable).

Ideally the value should be greater than one and, to provide a margin of safety, should be in the region of two.

Current Ratio Example

As an illustration we use the balance sheet below to show how to calculate the ratio.

To demonstrate the numbers used in the calculation are highlighted in the balance sheet shown. As can be seen in the above example the current assets are 680 and the current liabilities are 425.

In this case a value of 1.6 indicates that the current assets are 1.6 times greater than the current liabilities, and that the business should be able to pay its short term liabilities as they fall due.

The current ratio is reported on the ratios page of the financial projections template and should be monitored to ensure that it shows a value which is improving over time and is at least equal to one.

This current ratio will vary from industry to industry, and therefore it is important when making comparisons to determine an industry current ratio based on financial statements of businesses similar to your own.

While an increasing value can indicate increasing liquidity, a value which is too high implies a lot of funds are tied up in accounts receivables, inventories or as cash. It is generally accepted that funds tied up in this way earn very little or nothing for the business.

The current ratio is one of many financial ratio formulas used to analyse accounting financial statements.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

You May Also Like

These 112 House Republicans voted against Ukraine aid

• The House passed a more than $60 billion bill that provides more military aid to Ukraine.
• It's part of a larger foreign aid package that's likely to pass the Senate and be signed into law.
• 112 Republicans voted it against — the most ever, and a majority of the GOP conference.

The House of Representatives on Saturday passed a more than $60 billion bill to provide military and economic aid to Ukraine.

A solid majority of Republicans voted against the bill, which passed by a 311-112 margin. 101 Republicans voted for it, and one Republican, Rep. Dan Meuser of Pennsylvania, voted "present."

The Ukraine aid bill came to the floor after months of delay and despite staunch opposition from the hard right, including a threat from Rep. Marjorie Taylor Greene to call a vote to oust House Speaker Mike Johnson if he allowed such a vote.

Related stories

Under Johnson's unconventional plan , the Ukraine bill will be sent to the Senate as part of a package that includes aid for Israel and Taiwan and a third bill that forces a sale of TikTok and allows the United States to confiscate Russian assets . Each component received its own vote in the House on Saturday.

The bill is widely expected to pass the Senate in the coming days, as it generally mirrors a $95.3 billion national security bill passed by the upper chamber in February. President Joe Biden has pledged to sign it into law.

Saturday's vote marked the first time the House had approved billions of dollars in Ukraine aid since December 2022, when Democrats still controlled the chamber.

In the two years since Russia's invasion, opposition to aiding Ukraine has grown from a fringe position to a majority view among House GOP lawmakers. Many argue the money should be spent domestically or that policy changes at the US-Mexico border should take precedence.

The new infusion of aid comes at a make-or-break moment for Ukraine , which has faced ammo shortages and insufficient air defenses.

As a result of his move, Johnson could face a vote on his ouster in the coming weeks. The GOP speaker, however, has grown more willing to confront the threat from the right, and Democrats have suggested that they're willing to protect him from an ouster effort if he allowed a vote on Ukraine aid.

"If I operated out of fear of a motion to vacate, I would never be able to do my job," Johnson told reporters this week. "History judges us for what we do. This is a critical time right now."

Here are the 112 House Republicans who voted against the bill:

Watch: Highlights from Biden's fiery State of the Union address

• Main content

• Election 2024
• Entertainment
• Newsletters
• Photography
• Personal Finance
• AP Investigations
• AP Buyline Personal Finance
• AP Buyline Shopping
• Press Releases
• Israel-Hamas War
• Russia-Ukraine War
• Global elections
• Asia Pacific
• Latin America
• Middle East
• Election Results
• Delegate Tracker
• AP & Elections
• Auto Racing
• 2024 Paris Olympic Games
• Movie reviews
• Book reviews
• Personal finance
• Financial Markets
• Business Highlights
• Financial wellness
• Artificial Intelligence
• Social Media

KC Current owners announce plans for stadium district along the Kansas City riverfront

• Copy Link copied

KANSAS CITY, Mo. (AP) — The ownership group of the Kansas City Current announced plans Monday for the development of the Missouri River waterfront, where the club recently opened a purpose-built stadium for the National Women’s Soccer League team.

CPKC Stadium will serve as the hub for the project, which will break ground later this year and include residential units, public recreation and gathering spaces, and restaurant locations designed to create a pedestrian-friendly neighborhood setting.

Chris and Angie Long, part of the KC Current ownership group, said in a statement that more than $200 million in private funds have been guaranteed for the project. It is expected to exceed $800 million in total investment.

“Kansas City was founded at the confluence of the Missouri and Kansas rivers. With the next phase of our investment in Berkley Riverfront Park, our goal is to reconnect Kansas Citians to their riverfront, bringing even more energy and activity to the water,” Angie Long said. “We believe this foundational investment will benefit our community for years to come and cement the Berkley Riverfront as one of Kansas City’s great neighborhoods for residents and visitors alike.”

The announcement of the waterfront district, which lies on the north edge of downtown Kansas City, comes after residents in Jackson County, Missouri, voted down the extension of a sales tax initiative that would have earmarked money for the Chiefs and the Royals. The Chiefs wanted to use their share to help fund renovations to Arrowhead Stadium, while the Royals hoped to use their share to help fund a new stadium that would anchor a ballpark district at the southern edge of the downtown area.

The renderings unveiled by the KC Current show modern glass-and-stone buildings along with a promenade, and the club said the intention is for public spaces to be used year-round for movie nights, food festivals, live music and other gatherings.

The centerpiece of the project remains CPKC Stadium, which opened March 16. The $117 million stadium was almost entirely financed through private money and is believed to be the first of its size built for a women’s professional sports franchise.

“We are creating an experience on par with some of the best waterfront redevelopment projects in the country,” Chris Long said. “The Berkley Riverfront is the front door to Kansas City and our aim is to make it a world-class destination for all in our region.”

Marquee Development is leading the development alongside the KC Current. It has worked on projects such as Gallagher Way near Wrigley Field in Chicago, the North Loop Green in Minneapolis and FC Cincinnati’s mixed-use district.

Perkins Eastman will provide the architectural designs. It has worked on waterfront projects in New York and Washington.

The club said an impact study estimated the first phase of this project would deliver more than $210 million in economic output for the city over the next 30 years. It also said a portion of the residences would be set aside for lower-income housing.

“The historic development plan signed with the Current will connect Kansas Citians and visitors to entertainment, housing and retail opportunities,” Kansas City Mayor Quinton Lucas said, “generating millions in economic activity and thousands of jobs for generations to come in a long-underinvested area.”

AP soccer: https://apnews.com/hub/soccer