What the Current Ratio is All About
The current ratio is one of the most simple methods for measuring a company’s liquidity. If the current ratio is above 1, the company should theoretically be able to cover all its short term liabilities. In practice, this doesn’t tell the whole picture because many current assets may not be easy to liquidity, such as inventory and prepaid insurance. Accountants may also call it the “liquidity ratio”, “cash to asset ratio” and simply “cash ratio”.
Formula: Total Current Assets ÷ Total Current Liabilities
Total Current Assets and Total Current liabilities can be found on the balance sheet of companies following GAAP. Companies following IFRS report these figures on the Statement of Financial Position
Current Ratio Calculator
What is a Good Current Ratio for a Company?
The strength of the current ratio really is often a matter of industry comparisons. The airline industry, for example, operate with much lower current ratios when compared to Technology companies like Google and Apple.
For small business, lenders and creditors will generally want to see a current ratio above 1.5 for strong borrowers. Anything less would put the business at a higher risk of defaulting on borrowed funds. When the current ratio exceeds 2.0, it could be a sign that the company is not effectively managing its working capital.