Current Ratio Definition

Definition

The present ratio is a measure of bandwidth. The calculation merely takes two inputs out of the balance sheet: current assets and current liabilities. The existing ratio measures that the business ‘s means to pay for debt coming due within the next 1-2 months.

Calculation

Current Ratio = Current Assets / Current Liabilities

Explanation

Current assets are those tools which may be transformed into cash in under 1-2 weeks. Present-day obligations would be the debt of the business that has to be settled in cash during the next 1-2 months. The existing ratio measures that the business ‘s means to pay for its own debt coming due within the following 1-2 months. This is the reason the ratio is considered a measure of bandwidth.

One of those techniques to evaluate fluctuations in working capital would be always to have a look at the association between current assets and current liabilities. Creditors want to observe that a rather large ratio (more than 2.0). But a ratio that’s too much may signify that the inefficient utilization of funding funds.

When drawing conclusions concerning the comparative performance of an organization, grade comparisons should be made out of competitions in precisely the exact same industry.

Example

Company A’s balance sheet indicates total current assets of 12,240,000 and total current liabilities of 5,441,000. The present percentage for Company A will subsequently be:

= 12,240,000 / $5,441,000, or 2.25