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.

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: A higher ratio indicates better short-term financial health, while a ratio below 1 suggests potential liquidity problems.

3. Importance of Current Ratio

Details: The Current Ratio is crucial for assessing a company's financial health, determining creditworthiness, and making investment decisions. It's commonly used by creditors and investors.

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. Below 1 may indicate liquidity problems, while above 3 might suggest inefficient use of assets.

Q2: How does Current Ratio differ from Quick Ratio?
A: Quick Ratio (or Acid-Test Ratio) excludes inventory from current assets, providing a more conservative measure of liquidity.

Q3: Can Current Ratio be too high?
A: Yes, an excessively high ratio may indicate inefficient use of working capital or poor inventory management.

Q4: Does Current Ratio vary by industry?
A: Yes, acceptable ratios vary significantly by industry. Retail businesses often have higher ratios than service businesses.

Q5: How often should Current Ratio be calculated?
A: It should be monitored regularly, typically quarterly or annually, to track financial health over time.