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 compares a firm's current assets to its current liabilities (per Quizlet).

2. How Does the Calculator Work?

The calculator uses the Current Ratio formula:

Where:

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

Explanation: The ratio indicates how many times a company can pay off its current liabilities with its current assets.

3. Importance of Current Ratio

Details: A ratio above 1 indicates the company has more current assets than liabilities. A ratio below 1 may signal liquidity problems. However, ideal ratios vary by industry.

4. Using the Calculator

Tips: Enter current assets and current liabilities in dollars. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good current ratio?
A: Generally, a ratio between 1.5 and 3 is considered healthy, but this varies by industry.

Q2: What if the current ratio is too high?
A: A very high ratio may indicate inefficient use of current assets or poor working capital management.

Q3: How does this differ from the quick ratio?
A: The quick ratio excludes inventory from current assets, providing a more stringent liquidity measure.

Q4: Can current ratio be negative?
A: No, since both current assets and liabilities are positive values, the ratio is always positive.

Q5: Why is current ratio important for creditors?
A: It helps creditors assess a company's ability to pay its short-term debts.