The current ratio is a metric used by the finance industry to assess a company's short-term liquidity. It reflects a company's ability to generate enough cash to pay off all debts should they become due at the same time. While this scenario is highly unlikely, the ability of a business to liquidate assets quickly to meet obligations is indicative of its overall financial health.
Determining the Current Ratio
The current ratio, also known as a liquidity ratio, is a simple concept that requires only two pieces of data to compute: the total current assets and the total current liabilities.
Current assets include only those assets that take the form of cash or cash equivalents, such as stocks or other marketable securities that can be liquidated quickly. Current liabilities consist of only those debts that become due within the next year. By dividing the current assets by the current liabilities, the current ratio reflects the degree to which a company's short-term resources outstrip its debts.
Ideally, a company having a current ratio of 2 would indicatethat its assets equal twice its liabilities. While lower ratios may indicate a reduced ability to meet obligations, there are no hard and fast rules when it comes to a good or bad current ratio. Each company's ratio should be compared to those of others in the same industry, and with similar business models to establish what level of liquidity is the industry standard.
Calculating the Current Ratio in Excel
For very small businesses, calculating total current assets and total current liabilities may not be an overwhelming endeavor. As businesses grow, however, the number and types of debts and income streams can become greatly diversified. Microsoft Excel provides numerous free accounting templates that help to keep track of cash flow and other profitability metrics, including the liquidity analysis and ratios template.
Once you have determined your asset and liability totals, calculating the current ratio in Excel is very straightforward, even without a template.
First, input your current assets and current liabilities into adjacent cells, say B3 and B4. In cell B5, input the formula "=B3/B4" to divide your assets by your liabilities, andthe calculation for the current ratio will be displayed.
As an example, let's say that asmall business owner namedFrankis looking to expand and needs to determine his ability to take on more debt. Before applying for a loan, Frank wants to be sure he is more than able to meet his current obligations. Frank also wants to see how much new debt he can take on without overstretching his ability to cover payments. He doesn't want to rely on additional income that may or may not be generated by the expansion, so it's important to be sure his current assets can handle the increased burden.
After consulting theincome statement, Frank determines that his current assets for the year are $150,000, and his current liabilities clock in at $60,000. By dividing theassets of thebusinessby its liabilities, a current ratio of2.5 is calculated. Since the business has such an excellent ratio already, Frank can take on at least an additional $15,000 in loans to fund the expansion without sacrificingliquidity.
FAQs
First, input your current assets and current liabilities into adjacent cells, say B3 and B4. In cell B5, input the formula "=B3/B4" to divide your assets by your liabilities, and the calculation for the current ratio will be displayed.
What is the formula for calculating current ratio? ›
Current Ratio = Current Assets/Current Liabilities
The outcome indicates the number of times this company in question could pay off its immediate liabilities with its total current assets.
How do you calculate the ratio in Excel? ›
Select the cell where you want to display the ratio. Type in the formula for the ratio using the appropriate cell references. For example, to calculate the debt-to-equity ratio, you would type in =debt/equity . Press enter, and Excel will calculate the ratio and display the result in the cell.
How do I calculate current value in Excel? ›
The built-in function PV can easily calculate the present value with the given information. Enter "Present Value" into cell A4, and then enter the PV formula in B4, =PV(rate, nper, pmt, [fv], [type], which, in our example, is "=PV(B2,B1,0,B3)."
How do you calculate a quick ratio in Excel? ›
Quick ratio = Current Investments+Trade Receivables+Cash And Cash Equivalents+Short Term Loans And Advances+Other Current Assets/Current Liabilities. Quick ratio = 51906+5472+1754+4900+8231/152826. Quick ratio = 72263/152826.
How to calculate current ratio in Excel? ›
First, input your current assets and current liabilities into adjacent cells, say B3 and B4. In cell B5, input the formula "=B3/B4" to divide your assets by your liabilities, and the calculation for the current ratio will be displayed.
How to calculate ratio formula? ›
Set up your formula. Ratios compare two numbers, usually by dividing them. If you are comparing one data point (A) to another data point (B), your formula would be A/B. This means you are dividing information A by information B. For example, if A is five and B is 10, your ratio will be 5/10.
How to calculate in Excel formula? ›
Enter a formula that contains a built-in function
- Select an empty cell.
- Type an equal sign = and then type a function. For example, =SUM for getting the total sales.
- Type an opening parenthesis (.
- Select the range of cells, and then type a closing parenthesis).
- Press Enter to get the result.
To calculate sample proportions in Excel, use the PROPORTION function. Ensure that the numerator and denominator are in the same units. Input the formula =PROPORTION(numerator, denominator) into a cell to get the proportion.
What is the formula for growth ratio in Excel? ›
Using Growth Rate Formula in Excel
To calculate the growth rate in Microsoft Excel, use the formula: =(B3-B2)/B2 for annualized yield rate or =AVERAGE(C3:C20) for the average growth rate. Replace 20 with the last cell of your data.
In order to calculate electric current in a circuit, one can use the formula I=V/R. The variable "I" stands for current, while "V" stands for voltage and "R" stands for resistance.
How do I get current in Excel? ›
To insert the current date and time, press Ctrl+; (semi-colon), then press Space, and then press Ctrl+Shift+; (semi-colon).
How do I calculate current run rate in Excel? ›
Enter the revenue generated in a certain period in cell A1. Enter the number of periods in a year in cell A2. Enter the formula =A1* A2 in cell A3. The result in cell A3 will be the annual revenue run rate.
How do you calculate the current ratio? ›
You can calculate the current ratio by dividing a company's total current assets by its total current liabilities. Again, current assets are resources that can quickly be converted into cash within a year or less, including cash, accounts receivable and inventories.
Can Excel calculate ratios? ›
Another formula you can use to calculate ratios in Excel is by using the TEXT function, along with the SUBSTITUTE function. The TEXT function allows you to use a custom number format to calculate the ratio, and then the SUBSTITUTE function replaces the forward slash (/) with the colon (:). Let me show you how it works.
What is an example of a current ratio? ›
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.
How to calculate the current? ›
Electric current can be calculated using the electric current formula: I=V/R. This equation is also known as the "current equation" and it is derived from Ohm's Law. The variable "I" stands for current, while "V" stands for voltage and "R" stands for resistance.
What is the formula for current ratio quizlet? ›
What is the formula for the Current Ratio? Total Current Assets ÷ Total Current Liabilities.
What is the formula for the current acid ratio? ›
To calculate the acid-test ratio of a company, divide a company's current cash, marketable securities, and total accounts receivable by its current liabilities.
How to calculate quick ratio calculator? ›
Quick Ratio Calculator
- The quick ratio indicates how effectively a company can meet its current liabilities.
- The formula is simple: Quick ratio = (Current assets - Current inventory) / Current liabilities.
