1. What is the Current Ratio?

The Current Ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. It compares a firm's current assets to its current liabilities.

2. How Does the Calculator Work?

The calculator uses the Current Ratio formula:

Where:

• \( \text{Current Assets} \) — Cash and other assets expected to be converted to cash within a year
• \( \text{Current Liabilities} \) — Debts or obligations due within one year

Explanation: The ratio indicates how many times a company can pay off its current liabilities with its current assets.

3. Importance of Current Ratio

Details: A ratio above 1 indicates the company has more current assets than current liabilities. A ratio below 1 may signal potential liquidity problems. However, ideal ratios vary by industry.

4. Using the Calculator

Tips: Enter current assets and current liabilities in dollars. Both values must be positive numbers.

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. A ratio too high might indicate inefficient use of current assets.

Q2: How does current ratio differ from quick ratio?
A: Quick ratio excludes inventory from current assets, providing a more conservative measure of liquidity.

Q3: Can current ratio be too high?
A: Yes, an excessively high ratio may indicate poor management of working capital (e.g., too much inventory or unused cash).

Q4: How often should current ratio be calculated?
A: Typically calculated quarterly with financial statements, or more frequently for internal monitoring.

Q5: Does current ratio vary by industry?
A: Yes, industries with faster inventory turnover (like retail) can operate safely with lower ratios than capital-intensive industries.