1. What is Current Ratio?

Definition: The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year.

Purpose: It helps investors and creditors understand the liquidity of a company and how well it can meet its short-term financial obligations.

2. How Does the Current Ratio Work?

The calculator uses the formula:

Where:

• Current Assets — Cash and other assets expected to be converted to cash within a year
• Current Liabilities — Debts and obligations due within one year

Interpretation: A ratio above 1 indicates the company has more current assets than current liabilities, while below 1 suggests potential liquidity issues.

3. Importance of Current Ratio

Details: It's a key indicator of financial health, used by investors, creditors, and analysts to assess short-term financial stability.

4. Using the Calculator

Tips: Enter the total current assets and current liabilities in dollars. Current liabilities must be greater than 0.

5. Frequently Asked Questions (FAQ)

Q1: What is a good current ratio?
A: Generally, a ratio between 1.5 and 3 is considered healthy, but this varies by industry.

Q2: Can a current ratio be too high?
A: Yes, a very high ratio may indicate inefficient use of current assets or poor working capital management.

Q3: How does current ratio differ from quick ratio?
A: Quick ratio excludes inventory from current assets, providing a more conservative liquidity measure.

Q4: Where do I find current assets and liabilities?
A: These are listed on a company's balance sheet under "current assets" and "current liabilities."

Q5: How often should current ratio be calculated?
A: It should be monitored regularly, typically each quarter when financial statements are released.