Calculate Current Ratio

Calculate Current Ratio. Current Ratio Definition, Current Ratio Calculation, and all about the important Acid Test Quick Ratio.

Liquidity / Cash Flow

Cash flow is an important measure of a company’s liquidity. That is, the ability of the company to convert its assets into cash should such a need arise. The more liquid the company, the more flexible it will be in dealing with short-term liabilities.

Current Ratio Definition

The basic question is: how much cash can the company raise in the short term? Current liabilities refer to a company’s immediate obligations to creditors, such as short-term loans or goods purchased on credit. The higher the current ratio, the more liquid the company.

Calculate Current Ratio

The current ratio is a common measure of a company’s short-term liquidity position. It compares a company’s current assets and current liabilities. Current assets refer to the cash or near-cash assets held by the business.

Current Ratio = Current Assets / Current Liabilities

Acid Test Quick Ratio

However, a problem with the current ratio is that it might not truly measure how quickly a company can raise cash. ‘Near-cash assets’ is a broad term that can include relatively illiquid assets. One solution is to also consider the quick ratio, which subtracts a company’s inventory from its current assets before dividing the number by total current liabilities. This ratio is also known as the ‘acid test’.

Quick Ratio = (Current Assets – Inventory) / Current Liabilities

Sometimes, paying attention to the quick ratio can help you notice early warning signs of possible financial problems. Companies with a falling quick ratio but a steady current ratio indicate accumulating inventory at the expense of cash and receivables.

Return from How to calculate the Current Ratio to Financial Investment Advice

Return from Calculate Current Ratio to Financial Freedom and Passive Income Success Guide