Current Ratio Calculator

1. What is the Current Ratio Calculator?

Definition: This calculator computes the current ratio ($ CR $), which measures a company's ability to cover its current liabilities with its current assets, indicating short-term financial health.

Purpose: Helps businesses, investors, and creditors assess liquidity and the ability to meet short-term obligations using assets that can be converted to cash within a year.

2. How Does the Calculator Work?

The calculator uses a simple formula to compute the current ratio:

Formula:

$ CR = \frac{CA}{CL} $

Where:

$ CR $: Current Ratio
$ CA $: Current Assets (dollars)
$ CL $: Current Liabilities (dollars)

Steps:

Step 1: Determine $ CA $. Identify total current assets from the balance sheet (e.g., cash, accounts receivable, inventory).
Step 2: Determine $ CL $. Identify total current liabilities from the balance sheet (e.g., accounts payable, short-term debt).
Step 3: Calculate $ CR $. Divide $ CA $ by $ CL $.

3. Importance of Current Ratio Calculation

Calculating the current ratio is crucial for:

Liquidity Assessment: A higher $ CR $ indicates better ability to cover short-term liabilities.
Financial Health: Provides insight into a company's short-term solvency.
Risk Evaluation: Helps creditors and investors assess the risk of default on short-term obligations.

4. Using the Calculator

Example 1: $ CA = \$20,000,000 $, $ CL = \$10,000,000 $:

Step 1: $ CA = \$20,000,000 $.
Step 2: $ CL = \$10,000,000 $.
Step 3: $ CR = \frac{20,000,000}{10,000,000} = 2.00 $.
Result: $ CR = 2.00 $x.

A current ratio of 2.00x indicates the company can cover its liabilities twice with current assets.

Example 2: $ CA = \$5,000,000 $, $ CL = \$8,000,000 $:

Step 1: $ CA = \$5,000,000 $.
Step 2: $ CL = \$8,000,000 $.
Step 3: $ CR = \frac{5,000,000}{8,000,000} = 0.63 $.
Result: $ CR = 0.63 $x.

A current ratio of 0.63x suggests potential liquidity challenges.

Example 3: $ CA = \$15,000,000 $, $ CL = \$5,000,000 $:

Step 1: $ CA = \$15,000,000 $.
Step 2: $ CL = \$5,000,000 $.
Step 3: $ CR = \frac{15,000,000}{5,000,000} = 3.00 $.
Result: $ CR = 3.00 $x.

A current ratio of 3.00x indicates strong liquidity.

5. Frequently Asked Questions (FAQ)

Q: What is the current ratio?
A: The current ratio ($ CR $) measures a company's ability to pay off its current liabilities ($ CL $) using its current assets ($ CA $).

Q: What is a good current ratio?
A: A $ CR $ between 1.5 and 3 is generally considered healthy, indicating sufficient liquidity without excessive idle assets.

Q: Can the current ratio be negative?
A: No, since $ CA $ and $ CL $ are non-negative, $ CR $ is non-negative.