Current Ratio

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The Current Ratio (CUR) method is a model for measuring the liquidity of a company. It is calculated by dividing all current assets by all current liabilities. It is an indicator of a company's ability to pay short-term obligations.
 

Current Ratio formula

For the Current Ratio formula, see the picture on the right.

This ratio is also known as the working capital ratio and real ratio and is the standard measurement of a business' financial health. It will tell us whether a company is able to pay its current obligations by measuring if it has enough assets to cover its liabilities.

Example of Current Ratio calculation

For example, if a corporation has M$50 in current assets to cover M$50 in current liabilities, this means that it has a Current Ratio of 1.

What is an acceptable Current Ratio?

This varies by industry. Generally speaking, the more liquid the current assets, the smaller the CUR can be without cause for concern. For most industrial companies, 1.5 is an acceptable CUR. A standard CUR for a healthy business is close to two. This means the company has twice as many assets as liabilities.

A thing to remember when using the CUR is that it ignores timing of both cash received and cash paid out.

Take the example of a company with no bills due today, but lots of bills that are due tomorrow. The company also owns a lot of inventory (as part of its current assets). However the inventory will only be sold in the longer term. This company may show a good Current Ratio, but can not be considered as having a good liquidity.

Book: Steven M. Bragg - Business Ratios and Formulas : A Comprehensive Guide

Book: Ciaran Walsh - Key Management Ratios

Forum Forum about the Current Ratio. Start a new topic Share your knowledge or ask a question   🔥 NEW Current Ratio in Banks In bank accounting, which assets are normally considered current assets and which liabilities are called current liabilities? Thanks.... 11   Current Ratio Example A firm’s current assets and current liabilities are 1500 and 600 respectively. How much it can borrow from bank without reducing the current ratio below 1.5?... 7   3 comments Current Ratio Expansion? There is supposed to be some Expansion for CUR. Who can explain?... 5

Information Sources Various sources of information regarding the Current Ratio. Here you will find powerpoints, videos, news, etc. to use in your own lectures and workshops. Financial Statement Analysis | Ratio Analysis Ratio Analysis, Finanical Statement Analysis This presentation provides insights in Financial statement and ratio analysis, and includes the following sectios: 1. F... 3 Financial Ratios Every Manager Should Know Types of Financial Ratios, Financial Ratio Analysis, Financial Ratio Types Why financial ratio analysis? 1. To compare the financial health of (similar) companies (which one is doin... Quickly Reading a Profit and Loss Statement and a Balance Sheet Profit and Loss Statement Analysis, Analyzing a P&L This video explains that when we're reading a profit and loss statement as a director we should: - Not focus on the fig... Current Ratio Diagram Measuring Liquidity Download and edit the 12manage PowerPoint model for limited personal, educational and business use. Republishing in int...

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Compare with: Quick Ratio  |  Cash Ratio  |  Z-Score  |  Discounted Cash Flow  |  Free Cash Flow  |  Economic Value Added  |  Economic Margin  |  CFROI  |  Return on Invested Capital

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