Current Ratio Formula

Current Ratio Formula (Table of Contents)

• Formula of Current Ratio
• Current Ratio Calculator
• Template

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.

Without any ado, let’s look at the Formula of Current Ratio below.

Current Ratio Example

Let’s take a simple Current Ratio example to illustrate current ratio formula.

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 Give 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.

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Colgate Current Ratio Example

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 of Current Ratio Formula

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.

To calculate 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 with 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

Use of Current Ratio Formula

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 the 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 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 the this ratio of other companies under similar industry to check whether the this ratio of the target company in the desired range.

Current Ratio Calculator

You can use the following Current Ratio Calculator

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 with the formula of current ratio.

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

Current Ratio Formula Video

Recommended Articles

This has been a guide to 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 –

• Disadvantages of Accrued Expense Journal Entry
• Accrued Income Example
• Cash Ratio Formula in Excel
• Examples of Acid Test Ratio Formula
• What is Trade Receivables?
• Acid Test Ratio
• Cash Ratio Formula
• Working Capital Ratio Formula
• Current Ratio vs Quick Ratio