Current ratio – What is the current ratio?
The current ratio is a liquidity ratio that measures a company's ability to pay off their short-term dues with their current assets
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The current ratio helps to provide insight into a company’s ability to pay their short-term obligations back with their short-term (liquid) assets (basically, whether the company has enough cash to pay their immediate debts, if necessary).
If a company has a high ratio (anywhere above 1) then they are capable of paying their short-term obligations. The higher the ratio, the more capable the company.
On the other hand, if the company’s current ratio is below 1, this suggests that the company is not able to pay off their short-term liabilities with cash. This indicates poor financial health for a company, but does not necessarily mean they will unable to succeed.
The current ratio is (aka the liquidity ratio or cash ratio) is a simple formula:
Current assets / Current liabilities = Current ratio
Current ratio example
To see the current ratio in practice, here is an example: If a company had current assets of £100,000 and current liabilities of £50,000, then it’s current ratio would be solved by dividing the assets by the liabilities: £100,000 / £50,000 = 2.00. The company has a current ratio of 2.0, which would be considered a good ratio value in most industries.
While the value of acceptable current ratios varies from industry, a good ratio would often be between 1.5 and 2.
Why the current ratio is important
A company’s current ratio provides important insight into how liquid the company is and therefore lends data to the financial health of the business.
The current ratio is usually of interest to potential investors. It allows them to see a simple numerical value of a company that reveals important information about that company’s health.
However, there are some downsides to the current ratio. Because it typically falls within a very small range, it is often not very specific. Sometimes, much more information is needed to properly evaluate the health of business.
Debitoor and the current ratio
With Debitoor, you can register and track your assets with one of our larger plans. By managing depreciation, you maintain a better understanding of your company’s current ratio, and can see the impact over time.