WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Free Tutorials
  • Certification Courses
  • 250+ Courses All In One Bundle
  • Login
Home » Investment Banking Tutorials » Financial Statement Analysis » Current Ratio Formula

Current Ratio Formula

Current ratio is also known as the working capital ratio is a measure of short term liquidity as well as the overall health of a company and its formula “current assets divided by current liabilities” reflects the company’s ability to make enough cash to pay off its debt obligations once they are due.

What is Current Ratio Formula?

It is the most common ratio to calculate. And even if you ask any new investor, she will tell you about this ratio for sure.

Current Ratio = Current Assets / Current Liabilities

Current Ratio Formula

Current Ratio Example

Let’s take a simple Current Ratio example.

You can download this Current Ratio Excel Template here – Current Ratio Excel Template

Give Company has the following information –

  • Sundry Debtors – $40,000
  • Inventories – $30,000
  • Prepaid Expenses – $5000
  • Sundry Creditors – $25000
  • Outstanding salaries – $10,000

Find out the CR of giving Company.

Here we have all the information. From the information given, we need to separate out the current assets and the current liabilities.

  • Current Assets – Sundry Debtors, Inventories, Prepaid Expenses
  • Current Liabilities – Sundry Creditors, Outstanding Salaries

Now, we will find out the total of current assets and current liabilities.

  • Total Current Assets = (Sundry Debtors + Inventories + Prepaid Expenses) = ($40,000 + $30,000 + $5000) = $75,000
  • Total Current Liabilities = (Sundry Creditors + Outstanding Salaries) = ($25,000 + $10,000) = $35,000.
  • CR of Give Company is = Current Assets / Current Liabilities = $75,000 / $35,000 = 2.14.

Colgate Current Ratio Example

Colgate Current Ratio

Current Ratio is calculated as Current Assets of Colgate divided by Current Liabilities of Colgate.

  • CR of Colgate (2010) = 3,730 / 3,728 = 1.00x
  • CR of Colgate (2011) = 4,402 / 3,716 = 1.18x
  • CR of Colgate (2012) = 4,556 / 3,736 = 1.22x
  • CR of Colgate (2013) = 4,822 / 4,470 = 1.08x

For more details, refer to Ratio Analysis excel

Explanation

The current ratio is calculated because the investor wants to know how liquid a firm is. It is one of the liquidity ratios that are easy to calculate. And it also gives a quick idea about the liquidity of the company.

Popular Course in this category
Sale
All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)
4.9 (1,067 ratings)
250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
View Course

To calculate the current ratio, all we need are current assets and current liabilities.

Current assets include assets that can be liquidated within a year from now. If an asset can’t be liquidated within a year, it wouldn’t come under current assets.

It is similar to current liabilities. If the liability can’t be paid off within one year, we can’t consider it under current liabilities.

Current Assets Current Liabilities
Cash & cash equivalents Accounts Payable
Investments Deferred Revenues
Accounts receivable, or trade receivables Accrued Compensation
Notes receivable maturing within one year Other accrued expenses
Other receivables Accrued Income Taxes
Inventory of raw materials, WIP, finished goods Short Term notes
Office supplies Current Portion of Long term debt
Prepaid expenses
Advance payments

Uses

Why is this ratio called a liquidity ratio? It’s because it has two components in its – current assets and current liabilities.

Through this ratio, we look at whether the firm has enough current assets to pay off its current liabilities. It means if we liquidate all of the current assets of the company, whether the company would have enough cash to pay off its current liabilities. Therefore, if a company has more current assets and less current liabilities, it is a great position for a company to be in, in terms of liquidity.

As an investor, you don’t know whether the company has enough current assets to pay off its current liabilities. That’s why you need to use this ratio. And once the investor finds out this ratio of the company, she needs to go ahead and look at this ratio of similar companies under the same industry. And then she would check whether the current ratio of the target company is appropriate.

For the current ratio example, if Company A is the investor’s target company, she will first look at the current ratio of Company A (let’s say 3). And then she will look at this ratio of other companies under similar industry to check whether this ratio of the target company in the desired range.

Current Ratio Calculator

You can use the following Current Ratio Calculator

Current Assets
Current Liabilities
Current Ratio Formula
 

Current Ratio Formula =
Current Assets
=
Current Liabilities
0
= 0
0

Current Ratio Formula in Excel (with excel template)

Let us now do the same current ratio example above in Excel. This is very simple. You need to provide the two inputs of Current Assets and Current Liabilities.

You can easily calculate the ratio in the template provided. Now, we will find out the total of current assets and current liabilities.

current assets and current liabilities

Now to find the ratio of a given Company, we will use the following formula.

formula for current ratio

Current Ratio Formula in Excel

Current Ratio Formula Video

Recommended Articles

This has been a guide to the Current Ratio Formula, practical Current Ratio example, and Current Ratio calculator along with excel templates. You may also have a look at these articles below to learn more about Financial Analysis –

  • Differences – Current Ratio vs Quick Ratio
  • Calculate Win/Loss Ratio
  • Accrued Income Example
  • Cash Ratio Formula
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

WallStreetMojo

Free Ratio Analysis Course

Step by Step Guide to Calculating Financial Ratios in excel

WallStreetMojo

Download Current Ratio Excel Template

New Year Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More