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 indicates the financial health of a company and is calculated by dividing current assets by current liabilities.

2. How Does the Calculator Work?

The calculator uses the Current Ratio formula:

Where:

• Current Assets — Cash and other assets that are expected to be converted to cash within a year
• Current Liabilities — Debts or obligations that are due within one year

Explanation: The ratio provides insight into a company's short-term financial position and its ability to cover its short-term liabilities with its short-term assets.

3. Importance of Current Ratio Calculation

Details: The Current Ratio is a key indicator of financial stability. A ratio above 1 indicates that the company has more current assets than current liabilities, suggesting good short-term financial health. A ratio below 1 may indicate potential liquidity problems.

4. Using the Calculator

Tips: Enter current assets and current liabilities in currency format. Both values must be positive numbers greater than zero for accurate calculation.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good Current Ratio?
A: Generally, a Current Ratio between 1.5 and 3 is considered healthy. However, ideal ratios can vary by industry.

Q2: Can a Current Ratio be too high?
A: Yes, a very high Current Ratio may indicate that the company is not using its assets efficiently or is not investing excess cash properly.

Q3: How does Current Ratio differ from Quick Ratio?
A: The Quick Ratio is more conservative as it excludes inventory from current assets, providing a stricter measure of liquidity.

Q4: How often should Current Ratio be calculated?
A: It should be calculated regularly, typically quarterly or annually, to monitor a company's financial health over time.

Q5: What are the limitations of Current Ratio?
A: It doesn't account for the quality of current assets or the timing of cash flows. Some current assets may not be easily convertible to cash.