Enter the total current assets of your business or individual, as well as the total liabilities to calculate the current ratio. The current ratio is a measure of liquidity of a business.
Current Ratio Formula
The current ratio of a business can be calculated with the following equation:
Current Ratio = current assets / current liabilities
Where assets and liabilities are measured in currency and the ratio is unit less.
What is a current ratio?
A current ratio, as mentioned previously, is a measure of the liquidity of a business. The liquidity of a business the a measure of how easy it is for a business to fulfill it’s current obligations.
To think of this another way, a higher current ratio means a company is in a better position. If you have more assets than liabilities, your current ratio will be great than 1, which means you currently have enough in either cash or other assets to fulfill all of your liabilities. The goal for any company is to stay above a ratio of 1. Any less than this and a company may quickly turn into financial ruin.
How to calculate current ratio?
Let;s look at an example of how current ratio is calculated. Let’s assume you an owner of a business. First, you need to calculate your total assets. This includes all types of assets, including cash, physical goods, property, ect. Once we calculate this, we find your business has $100,000.00 in assets.
Next, we need to calculate the total liabilities of your company. This includes debts, loans, outstanding payments, ect. We find your company has $50,000.00 in liabilities.
Finally, we need to divide assets by liabilities and we find you have a current ratio of 2.0. That’s great! You’re in good shape.
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