Whether you’re into investments or you’re planning to start a business, it’s always good to know your current ratio. This gives you an idea about the stability of a company and how it much more profitable it can be in the long term. However, many people are confused about the concept of the current ratio. Below is the handy Current Ratio Calculator, which can help you determine the current ratio of a given company.

What is the Current Ratio?

Also known as the working capital, the current ratio measures a company’s ability to pay its short-term obligations or obligations that are due within one fiscal year. It’s a good way to let analysts and investors know how a particular company can maximize its current assets to pay off debts and other payables. It lets investors know if a company is stable enough to pay off any short-term debts with the assets that it currently has.

The current ratio compares the company’s current assets (both liquid and non-liquid) against its current liabilities. Assets are either cash or any items that can be turned into cash within a year. Liabilities, on the other hand, are amounts owed that must be paid within a year or less.

How to Calculate the Current Ratio

Calculating the current ratio of a company may seem taxing, but it’s actually quite simple with the Current Ratio Calculator. The first thing you must do is to check the financial statement of a company to find the value of its current assets. Then find out its current liabilities. All of this information can be found in the company’s balance sheet.

Once you know this information, input the value of the current assets in the “current assets” field of the calculator. Then input the value of the liabilities in the “current liabilities” field. You will then get a numeric value for the current ratio.

Is the Current Ratio of a Company Good or Bad?

There is no simple answer to this one. Many companies may have a seemingly bad current ratio because they can’t quickly pay off their liabilities. However, some companies may have a slow ROI and therefore a bad current ratio, but it quickly gains more assets as liabilities get paid off in time.

As a quick rule of thumb, a good current should be around 1.5 to 3. A current ratio of 1 indicates that your assets are equal to your liabilities. This means that to pay off your liabilities, you would have to liquidate all of your assets. A current ratio that is less than 1 indicates that a company has disproportionately more liabilities than assets. This means that the company is not yet stable enough to cover its payables for the year.

In contrast, a current ratio of 3 is quite good. This indicates that you have thrice as much as in assets as you do in liabilities. 

Keep in mind, however, that an exceedingly high current ratio isn’t always a good thing. If a company has a very high current ratio, it could indicate that it doesn’t use its assets efficiently enough to gain more capital for future endeavors.