Asked by: Ximei Toaquiza
business and finance debt factoring and invoice discounting

What is a company's current ratio?

Last Updated: 26th February, 2020

32
The current ratio is a liquidity ratiothatmeasures a company's ability to pay short-termobligations orthose due within one year. It tells investors andanalysts how acompany can maximize the currentassets on its balancesheet to satisfy its current debt andotherpayables.

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Simply so, what is a good current ratio for a company?

Acceptable current ratios vary from industrytoindustry and are generally between 1.5% and 3% forhealthybusinesses. If a company's current ratio is in thisrange,then it generally indicates good short-termfinancialstrength.

Additionally, what does a good current ratio mean? A current ratio of between 1.0-3.0 isprettyencouraging for a business. It suggests that the businesshasenough cash to be able to pay its debts, but not too muchfinancetied up in current assets which could bereinvestedor distributed to shareholders.

Similarly one may ask, how do you interpret current ratio?

If Current Assets > CurrentLiabilities,then Ratio is greater than 1.0 -> adesirable situation tobe in. If Current Assets =Current Liabilities, thenRatio is equal to 1.0 ->Current Assets are justenough to paydown the short termobligations.

What affects current ratio?

The operations current ratio is obtainedbydividing total current assets by the totalcurrentliabilities and expressed as that result to one.Example: Totalcurrent assets of $755,248 divided by totalcurrentliabilities $359,342 =2.10:1. For every one dollarofcurrent debt the is 2.1 dollars ofcurrentassets.

Related Question Answers

Aiyana Kirsche

Professional

What is a good debt ratio?

Generally, a ratio of 0.4 – 40percent– or lower is considered a good debt ratio.Aratio above 0.6 is generally considered to be apoorratio, since there's a risk that the business willnotgenerate enough cash flow to service itsdebt.

Ashli Weinstein

Professional

What is an acceptable debt ratio?

A ratio of 15% or lower is healthy, and 20%orhigher is considered a warning sign. Debt toincomeratio: This indicates the percentage of gross incomethatgoes toward housing costs. This includes mortgagepayment(principal and interest) as well as property taxes andpropertyinsurance divided by your gross income.

Capitolina Andermark

Professional

What is a healthy quick ratio?

Generally, the acid test ratio should be 1:1orhigher; however, this varies widely by industry. In general,thehigher the ratio, the greater the company's liquidity(i.e.,the better able to meet current obligations usingliquidassets).

Cerasela Zelik

Explainer

What is a strong quick ratio?

The quick ratio is a measure of how well acompanycan meet its short-term financial liabilities. Also knownas theacid-test ratio, it can be calculated asfollows:(Cash + Marketable Securities + Accounts Receivable)/Current Liabilities.

Bismark Murca

Explainer

What happens if current ratio is too high?

The higher the ratio, the more liquidthecompany is. If the current ratio is too high(muchmore than 2), then the company may not be using itscurrentassets or its short-term financing facilitiesefficiently. This mayalso indicate problems in working capitalmanagement.

Lilyana Sechtling

Explainer

What is a good inventory turnover ratio?

What is the best inventory turnover ratio?Formany ecommerce businesses, the ideal inventoryturnoverratio is about 4 to 6. All businesses are different, ofcourse,but in general a ratio between 4 and 6 usually meansthatthe rate at which you restock items is well balanced withyoursales.

Thurman Orvay

Pundit

What does a current ratio of 3 mean?

Of particular concern is the increase inaccountspayable in Year 3, which indicates a rapidlydeterioratingability to pay suppliers. Since the ratio iscurrentassets divided by current liabilities, theratioessentially implies that current liabilitiescan beliquidated to pay for currentassets.

Emigdia Miltenberger

Pundit

What are examples of liquidity ratios?

The most common liquidity ratios include;thecurrent ratio and the quick ratio.

Clora Stempliewicz

Pundit

What does a decrease in current ratio mean?

Figuring Your Current Ratio
A decline in this ratio canbeattributable to an increase in short-term debt,adecrease in current assets, or a combination ofboth.Regardless of the reasons, a decline in thisratiomeans a reduced ability to generatecash.

Trinitario Gehmeyr

Pundit

What is a good current ratio?

The company has a current ratio of 2.0,whichwould be considered a good ratio value in mostindustries.While the value of acceptable current ratiosvaries fromindustry, a good ratio would often be between 1.5and2.

Warda Kriechbaum

Pundit

How do you explain liquidity ratios?

Key Terms
  1. Liquidity - the ability of a company to meet itsfinancialobligations as they come due.
  2. Liquidity ratio - a computation that is used to measureacompany's ability to pay its short-term debts.
  3. Current ratio - measures a company's ability to pay itscurrentliabilities from its current assets.

Katrina Richartz

Teacher

What is the difference between current ratio and quick ratio?

The current ratio is the proportion (orquotientor fraction) of the amount of current assets dividedby theamount of current liabilities. The quick ratio(orthe acid test ratio) is the proportion of 1) only themostliquid current assets to 2) the amount ofcurrentliabilities.

Eulogio Jantsch

Teacher

What does total debt ratio mean?

The debt ratio is defined as the ratiooftotal debt to total assets, expressed as a decimalorpercentage. In other words, the company hasmoreliabilities than assets. A high ratio alsoindicatesthat a company may be putting itself at a risk of defaulton itsloans if interest rates were to rise suddenly.

Lesme Urabayen

Teacher

What does a negative current ratio mean?

Negative working capital is closely tied tothecurrent ratio, which is calculated as acompany'scurrent assets divided by its currentliabilities. Ifa current ratio is less than 1, thecurrentliabilities exceed the current assets and theworkingcapital is negative.

Cesareo Arze

Teacher

How do you increase current assets?

How to improve the current ratio?
  1. Faster Conversion Cycle of Debtors or AccountsReceivables.
  2. Pay off Current Liabilities.
  3. Sell-off Unproductive Assets.
  4. Improve Current Asset by Rising Shareholder's Funds.
  5. Sweep Bank Accounts.

Spaska

Reviewer

How do you figure debt ratio?

The debt ratio is calculated by dividingtotalliabilities by total assets. Both of these numbers can easilybefound the balance sheet. Here is the calculation: Make sure youusethe total liabilities and the total assets inyourcalculation.

Hrafn Lacoba

Reviewer

What is a ratio analysis?

Ratio analysis is the comparison of line itemsinthe financial statements of a business. Ratio analysisisused to evaluate a number of issues with an entity, such asitsliquidity, efficiency of operations,andprofitability.

Minko Urbanowski

Reviewer

What are the most important liquidity ratios and why?

Liquidity ratios greater than 1 indicate thatthecompany is in good financial health and it is less likely fallintofinancial difficulties. Most common examples ofliquidityratios include current ratio, acid testratio(also known as quick ratio), cash ratioand workingcapital ratio.

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26th February, 2020

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