current ratio

(noun)

current assets divided by current liabilities

Related Terms

  • current liabilities
  • creditor
  • liquidity

Examples of current ratio in the following topics:

  • Current Ratio

    • The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months.
    • The current ratio is calculated by taking total current assets and dividing by total current liabilities.
    • If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations (current liabilities).
    • This can allow a firm to operate with a low current ratio.
    • The current ratio can be use to evaluate a company's liquidity.
  • Current Ratio

    • Current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months.
    • If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations.
    • This can allow a firm to operate with a low current ratio.
    • If all other things were equal, a creditor, who is expecting to be paid in the next 12 months, would consider a high current ratio to be better than a low current ratio.
    • Use a company's current ratio to evaluate its short-term financial strength
  • Liquidity Ratios

    • X's Current Ratio = 3000 / 1,000 = 3, and so can be considered healthy.
    • One such ratio is known as the current ratio, which is equal to:
    • Acceptable current ratios vary from industry to industry.
    • If current liabilities exceed current assets (i.e., the current ratio is below 1), then the company may have problems meeting its short-term obligations.
    • The acid test ratio (or quick ratio) is similar to current ratio except in that it ignores inventories.
  • Liquidity

    • Liquidity, a business's ability to pay obligations, can be assessed using various ratios: current ratio, quick ratio, etc.
    • The current ratio, which is the simplest measure and is calculated by dividing the total current assets by the total current liabilities.
    • The quick ratio, which is calculated by deducting inventories and prepayments from current assets and then dividing by current liabilities--this gives a measure of the ability to meet current liabilities from assets that can be readily sold.
    • The operating cash flow ratio can be calculated by dividing the operating cash flow by current liabilities.
    • The liquidity ratio (acid test) is a ratio used to determine the liquidity of a business entity.
  • Selected Financial Ratios and Analyses

    • Financial ratios may be used by managers within a firm, by current and potential shareholders (owners), and by a firm's creditors.
    • A publicly traded company's stock price can also be a variable used in the computation of certain ratios, such as the price/earnings ratio.
    • The current ratio is used to determine a company's liquidity, or its ability to meet its short term obligations.
    • When comparing two companies, in theory, the entity with the higher current ratio is more liquid than the other.
    • However, it is important to note that determination of a company's solvency is based on various factors and not just the value of the current ratio.
  • Acid Test Ratio

    • The acid-test, or quick ratio, measures the ability of a company to use its near cash or quick assets to pay off its current liabilities.
    • The acid-test ratio, also known as the quick ratio, measures the ability of a company to use its near cash or quick assets to immediately extinguish or retire its current liabilities.
    • In general, the higher the ratio is, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).
    • A company with a quick ratio of less than 1 cannot currently pay back its short-term liabilities.
    • The acid-test ratio is similar to the current ratio except the value of inventory is omitted from the calculation.
  • Quick Ratio (Acid-Test Ratio)

    • The Acid Test or Quick Ratio measures the ability of a company to use its assets to retire its current liabilities immediately.
    • A company with a Quick Ratio of less than 1 cannot pay back its current liabilities.
    • Quick Ratio = (Cash and cash equivalent + Marketable securities + Accounts receivable) / Current liabilities.
    • Acid test often refers to Cash ratio instead of Quick ratio: Acid Test Ratio = (Current assets - Inventory) / Current liabilities.
    • Note that Inventory is excluded from the sum of assets in the Quick Ratio, but included in the Current Ratio.
  • Ratio Analysis and EPS

    • Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors.
    • Acid-test ratio (Quick ratio): (Current assets - Inventory - Prepayments) / Current liabilities
    • Times interest earned ratio (Interest Coverage Ratio): EBIT / Annual interest expense
    • Return on assets (ROA ratio or Du Pont Ratio): Net income / Average total assets
    • Ratio analysis includes profitability ratios, activity (efficiency) ratios, debt ratios, liquidity ratios and market (value) ratios
  • Performance per Share

    • Valuation ratios describe the value of shares to shareholders, and include the EPS ratio, the P/E ratio, and the dividend yield ratio.
    • Current Dividend Yield = Most Recent Full Year Dividend / Current Share Price.
    • Investors seeking high current income and limited capital growth prefer companies with a high dividend payout ratio.
    • Market To Book ratio is used to compare a company's current market price to its book value.
    • The second method, using per-share values, is to divide the company's current share price by the book value per share, which is its book value divided by the number of outstanding shares (Share Price / Book Value Per Share).
  • Total Debt to Total Assets

    • The debt ratio is expressed as Total debt / Total assets.
    • Financial ratios are categorized according to the financial aspect of the business which the ratio measures.
    • Debt ratios measure the firm's ability to repay long-term debt.
    • It is the ratio of total debt (the sum of current liabilities and long-term liabilities) and total assets (the sum of current assets, fixed assets, and other assets such as 'goodwill').
    • Like all financial ratios, a company's debt ratio should be compared with their industry average or other competing firms.
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