How to Calculate Current Assets Ratio

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The current assets ratio is also referred to as the current ratio, or working capital ratio. Current ratio is one of several liquidity ratios used to measure the ability of a company to pay short-term debts. The two parts that compose current ratio are current assets and current liabilities. A company's current ratio aids potential creditors in deciding whether to issue short-term credit.

Calculate your total current assets. Current assets include items such as cash, accounts receivable and inventory. Current assets also include any other items that may be turned into cash within one year.

Calculate your company's current liabilities. Current liabilities are obligations that a company will be expected to pay within one year. Current liabilities include items such as notes and accounts payable, dividends payable and accrued expenses. Accrued expenses are items that have been incurred but for which no payment has been made.

Divide total current assets by total current liabilities. For example, if a company has total current assets of $1 million and current liabilities totaling $500,000, the resulting current ratio is 2. A high current ratio increases the likelihood that your company can meet its current obligations. In addition, creditors prefer a higher current ratio because it reduces their risk when extending short-term loans.

Tips & Warnings

  • Shareholders may prefer a smaller current ratio because it may be an indicator that the company is using its resources to expand the business. Generally speaking, a current ratio at 2 or above is a good number. Current ratios vary from industry to industry.
  • A large current ratio doesn't always mean that a company is liquid. For example, if a company has significant works in process or stock that accounts for the bulk of current assets, these items may not be sold in time to help a company meet its current debts.

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