In other words, the current ratio is a good indicator of your company’s ability to cover all of your pressing debt obligations with the cash and short-term assets you have on hand. It’s one of the ways to measure the solvency and overall financial health of your company. If a company’s financials don’t provide a breakdown of its quick assets, you can still calculate the quick ratio. You can subtract inventory and current prepaid assets from current assets, and divide that difference by current liabilities. If a company has a current ratio of less than one, it has fewer current assets than current liabilities. Creditors would consider the company a financial risk because it might not be able to easily pay down its short-term obligations.
Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom. Obotu has 2+years of professional experience in the business and finance sector. Her expertise lies in marketing, economics, finance, biology, and literature. She enjoys writing in these fields computing current ratio to educate and share her wealth of knowledge and experience. Accounts receivable transactions are posted when you sell goods to customers on credit, and you need to monitor the receivable balance. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.
Current Ratio Calculation
However, if you learned this skill through other means, such as coursework or on your own, your cover letter is a great place to go into more detail. For example, you could describe a project you did at school that involved evaluating a company’s financial health or an instance where you helped a friend’s small business work out its finances. A high ratio can indicate that https://www.bookstime.com/articles/self-employment-tax the company is not effectively utilizing its assets. For example, companies could invest that money or use it for research and development, promoting longer-term growth, rather than holding a large amount of liquid assets. In general, a higher current ratio indicates better liquidity, while a lower current ratio may signal difficulty in meeting short-term obligations.
In this example, Company A has much more inventory than Company B, which will be harder to turn into cash in the short term. Perhaps this inventory is overstocked or unwanted, which eventually may reduce its value on the balance sheet. Company B has more cash, which is the most liquid asset, and more accounts receivable, which could be collected more quickly than liquidating inventory. Although the total value of current assets matches, Company B is in a more liquid, solvent position.