# Current Ratio Formula

Current Assets / Current Liabilities

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## What is the Current Ratio?

The current ratio, also known as the working capital ratio, measures the capability of a business to meet its short-term obligations that are due within a year. The ratio considers the weight of total current assets versus total current liabilities.

It indicates the financial health of a company and how it can maximize the liquidity of its current assets to settle debt and payables. The current ratio formula (below) can be used to easily measure a company’s liquidity.

### Current Ratio Formula

The Current Ratio formula is:

Current Ratio = Current Assets / Current Liabilities

### Example of the Current Ratio Formula

• Cash = \$15 million
• Marketable securities = \$20 million
• Inventory = \$25 million
• Short-term debt = \$15 million
• Accounts payables = \$15 million

Current assets = 15 + 20 + 25 = 60 million

Current liabilities = 15 + 15 = 30 million

Current ratio = 60 million / 30 million = 2.0x

The business currently has a current ratio of 2, meaning it can easily settle each dollar on loan or accounts payable twice. A rate of more than 1 suggests financial well-being for the company. There is no upper end on what is “too much,” as it can be very dependent on the industry, however, a very high current ratio may indicate that a company is leaving excess cash unused rather than investing in growing its business.

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### Current Ratio Formula – What are Current Assets?

Current assets are resources that can quickly be converted into cash within a year’s time or less. They include the following:

• Cash – Legal tender bills, coins, undeposited checks from customers, checking and savings accounts, petty cash
• Cash equivalents – Corporate or government securities with 90 days or less maturity
• Marketable securities – Common stock, preferred stock, government and corporate bonds with a maturity date of 1 year or less
• Accounts receivable – Money owed to the company by customers and that is due within a year – This net value should be after deducting an allowance for doubtful accounts (bad credit)
• Notes receivable – Debt that is maturing within a year
• Other receivables – Insurance claims, employee cash advances, income tax refunds
• Inventory – Raw materials, work-in-process, finished goods, manufacturing/packaging supplies
• Office supplies – Office resources such as paper, pens, and equipment expected to be consumed within a year
• Prepaid expenses – Unexpired insurance premiums, advance payments on future purchases

### Current Ratio Formula – What are Current Liabilities?

Current liabilities are business obligations owed to suppliers and creditors, and other payments that are due within a year’s time. This includes:

• Notes payable – Interest and the principal portion of loans that will become due within one year
• Accounts payable or Trade payable – Credit resulting from the purchase of merchandise, raw materials, supplies, or usage of services and utilities
• Accrued expenses – Payroll taxes payable, income taxes payable, interest payable, and anything else that has been accrued for but an invoice is not received
• Deferred revenue – Revenue that the company has been paid for that will be earned in the future when the company satisfies revenue recognition requirements

### Why Use the Current Ratio Formula?

This current ratio is classed with several other financial metrics known as liquidity ratios. These ratios all assess the operations of a company in terms of how financially solid the company is in relation to its outstanding debt. Knowing the current ratio is vital in decision-making for investors, creditors, and suppliers of a company. The current ratio is an important tool in assessing the viability of their business interest.

Other important liquidity ratios include:

Below is a video explanation of how to calculate the current ratio and why it matters when performing an analysis of financial statements.

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