What is the current ratio? (2024)

FAQs

What is the current ratio? ›

A good current ratio for a company is considered between 1.5-2.0 and higher, which indicates a comfortable financial position. As a rule of thumb, investors don't want to see a ratio below 1.0. This would indicate that the company might run out of money within the year or even sooner.

The current ratio formula is the current assets of a company divided by its current liabilities. A current ratio of around 1.5x to 3.0x is considered to be healthy, whereas a current ratio below 1.0x is deemed a red flag that implies the near-term liquidity of the company presents risks.

A good current ratio is between 1.2 to 2, which means that the business has 2 times more current assets than liabilities to covers its debts. A current ratio below 1 means that the company doesn't have enough liquid assets to cover its short-term liabilities.

If the current ratio is greater than 1, it generally suggests that the company has enough current assets to cover its current liabilities. In other words, it's in a pretty good financial position to meet its immediate financial obligations. On the flip side, if the current ratio falls below 1, it could be a red flag.

In this case, current liabilities are expressed as 1 and current assets are expressed as whatever proportionate figure they come to. For example, if current liabilities are $40,000 and current assets are $60,000, the current ratio would be: $40,000 : $60,000, or 1 : 1.5.

Typically, a company's current ratio is computed by dividing its total current assets by its total current liabilities. The outcome indicates the number of times this company in question could pay off its immediate liabilities with its total current assets. Amount (Rs.)

For example, if there are eight oranges and six lemons in a bowl of fruit, then the ratio of oranges to lemons is eight to six (that is, 8:6, which is equivalent to the ratio 4:3). Similarly, the ratio of lemons to oranges is 6:8 (or 3:4) and the ratio of oranges to the total amount of fruit is 8:14 (or 4:7).

Since ratios compare data between two numbers of the same kind, this means your formula would be A divided by B. For instance, if A equals 5 and B equals 10, then your ratio will be 5 divided by 10. Now, you're ready to solve the equation. Divide A by B to find a ratio. In this case, the answer is 0.5.

The higher the ratio is, the more capable you are of paying off your debts. If your current ratio is low, it means you will have a difficult time paying your immediate debts and liabilities. In general, a current ratio of 2 or higher is considered good, and anything lower than 2 is a cause for concern.

What is a good quick ratio? When it comes to the quick ratio, generally the higher it is, the better. As a business, you should aim for a ratio that is greater than or equal to one. A ratio of 1 or more shows your company has enough liquid assets to meet its short-term obligations.

What is a healthy quick and current ratio? ›

The quick ratio of a company excludes inventory from its calculations, while current ratio calculations include inventory. A 2:1 result is ideal for the current ratio, while a 1:1 is the perfect quick ratio for most businesses except SaaS.

The current ratio is also referred to as the working capital ratio. This ratio compares a company's current assets to its current liabilities, testing whether it sustainably balances assets, financing, and liabilities.

A current ratio lower than one indicates risk and makes it hard for a company to meet its short-term obligations. Anything less than one means that a company has more current liabilities than its current assets. For example, a ratio of 0.5 means a company has twice its current liabilities than its current assets.

There is no ideal figure, but a cash ratio is considered good if it is between 0.5 and 1. For example, a company with $200,000 in cash and cash equivalents, and $150,000 in liabilities, will have a 1.33 cash ratio.

Answer: Some examples of solutions are salt water, rubbing alcohol, and sugar dissolved in water. When you look closely, upon mixing salt with water, you can't see the salt particles anymore, making this a hom*ogeneous mixture.

The higher the ratio is, the more capable you are of paying off your debts. If your current ratio is low, it means you will have a difficult time paying your immediate debts and liabilities. In general, a current ratio of 2 or higher is considered good, and anything lower than 2 is a cause for concern.

If a company's current assets are $600,000 and its current liabilities are $200,000 the current ratio is 3:1. If the current assets are $600,000 and the current liabilities are $500,000 the current ratio is 1.2:1. Obviously a larger current ratio is better than a smaller ratio.