Current Ratio

Date created: Feb 8, 2019  •   Last updated: May 18, 2021

What is Current Ratio?

Current Ratio measures the ability of your organization to pay all of their financial obligations in the short term, which is generally one year. This ratio accounts for your current assets, such as accounts receivable, and your current liabilities, such as accounts payable, to help you understand the solvency of your business.

Alternate names: Working Capital Ratio

Formula

ƒ Sum(Current Assets) / Sum(Current Liabilities)

How to calculate

A company has the following: Current assets = $6,877,756 Current liabilities = $438,332 The current ratio is therefore calculated as follows: $6,877,756 / $438,332 = 15.69 This company is able to cover its current liabilities 15 times with their current assets showing a healthy Working Capital Ratio.

Current Ratio

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What is a good Current Ratio benchmark?

Generally speaking, a ratio between 1.5 and 3 is preferable and indicates strong financial performance.

More about this metric

The current ratio, also known as working capital ratio, is a financial performance measure of company liquidity. This metric indicates a company's ability to meet short-term debt obligations by measuring whether or not a firm has enough resources to pay its debts over the next 12 months. It can also give a sense of the efficiency of a company's operating cycle or its ability to turn its product or service into cash.

A Current Ratio of less than 1 indicates that your organization would be unable to meet all of your financial obligations if they came due at the same time. While this certainly is not good, it's not uncommon for organizations to operate in the red for short periods of time, especially if the business is funding growth by accumulating debt. On the other hand, a high Current Ratio may mean that the business is sitting on a large amount of cash, instead of investing it back into the business.

Current Ratio provides investors and financial analysts with an indication of the efficiency of your company's operating cycle. In other words, is your business able to generate a constant revenue stream and collect account receivables in a timely manner? These important questions tell potential investors a lot about the financial health of your organization.