current ratio

(noun)

current assets divided by current liabilities

Related Terms

  • working capital management

Examples of current ratio in the following topics:

  • 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

    • 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.
  • 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
  • Market/Book Ratio

    • The price-to-book ratio is a financial ratio used to compare a company's current market price to its book value.
    • The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's current market price to its book value.
    • The second way, using per-share values, is to divide the company's current share price by the book value per share (i.e. its book value divided by the number of outstanding shares).
    • As with most ratios, it varies a fair amount by industry.
    • It is also known as the market-to-book ratio and the price-to-equity ratio (which should not be confused with the price-to-earnings ratio), and its inverse is called the book-to-market ratio.
  • 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.
  • Setting the Target Payout Ratio

    • The Target Payout Ratio, or Dividend Payout Ratio, is the fraction of net income a firm pays to its stockholders in dividends.
    • Investors seeking high current income and limited capital growth prefer companies with high Dividend Payout Ratios.
    • However investors seeking capital growth may prefer lower payout ratios.
    • The Target Payout Ratio depends on what investors the management of a company are trying to attract, and what current investors' expectations are.
    • High growth firms in early life generally have low or zero payout ratios.
  • Classification

    • Ratio analysis consists of calculating financial performance using five basic types of ratios: profitability, liquidity, activity, debt, and market.
    • Financial ratios may be used internally by managers within a firm, by current and potential shareholders and creditors of a firm, and other audiences interested in understanding the strengths and weaknesses of a company, especially compared to the company over time or compared to other companies.
    • Activity ratios, also called efficiency ratios, measure the effectiveness of a firm's use of resources, or assets.
    • Market ratios are concerned with shareholder audiences.
    • Classify a financial ratio based on what it measures in a company
  • Debt to Equity

    • The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets.
    • Quoted ratios can even exclude the current portion of the LTD.
    • A similar ratio is the ratio of debt-to-capital (D/C), where capital is the sum of debt and equity:D/C = total liabilities / total capital = debt / (debt + equity)
    • This is summarized by their leverage ratio, which is the ratio of total debt to total equity.
    • A higher ratio indicates more risk.
Subjects
  • Accounting
  • Algebra
  • Art History
  • Biology
  • Business
  • Calculus
  • Chemistry
  • Communications
  • Economics
  • Finance
  • Management
  • Marketing
  • Microbiology
  • Physics
  • Physiology
  • Political Science
  • Psychology
  • Sociology
  • Statistics
  • U.S. History
  • World History
  • Writing

Except where noted, content and user contributions on this site are licensed under CC BY-SA 4.0 with attribution required.