Current Ratio Formula (Examples) | How to Calculate Current Ratio?

Current Ratio Formula (Examples) | How to Calculate Current Ratio?


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friends today we are going to learn a concept or tutorial on current ratio
Formula one of the most important ratio while assessing the financial health of
any company when current ratio formula is quite visible right in front of us it
means your current assets divided by current liabilities now this is very
simple but we need to go into the nitty-gritty of this particular ratio so
that we can get more inside of the same for the same so now let’s start with the
current ratio formula and it is the most important ratio to calculate and even if
you ask any investor he or she will tell you about the ratio for sure and without
any at all let’s look at the formula of the current ratio now as we just saw
that current ratio see R is equal to your current assets divided by your
current liabilities current assets includes everything current liabilities
include everything there will be no exclusion or like that which happens in
the case of quick ratio where some of the assets have been excluded because of
the reason being they are not that liquid the liquid ratio determines that
you know there should be in 90 days benchmark for any asset for any current
answer to be liquidated so in case of the current in case of the current ratio
everything is included now let’s take an example so that you know we get more
insight on this particular case let’s say there’s this company called Mark
limited and it has a detailed something like this let’s let’s say it has debtors
$40,000 inventories or illustrate stock over
here let’s sit the stock is 30000 prepaid expenses let’s say $5000 and you have some sundry creditors which are close enough
to $25000 the next is your outstanding shares which is
close enough to $10000 so your total data is right in front of
us and we can now we can now calculate the current ratio of the given company
see here we we have all the information right in front of you from the
information given we need to separate out the current assets and the current
liabilities so your current assets is going to be your debtors right then you
have inventories in here that is your stock then you have the thing called
prepaid expenses and how about the current liabilities so for current
liability we have creditors and we have outstanding not outstanding not share
shares its salaries okay these are outstanding salaries so
this is your current assets and current liabilities which we have segregated now
we’ll find out the total current assets and current liabilities so the total
current assets is going to be your debtors plus your stock and any
prepaid expenses right so that will amount to $75,000 and
current liability will be your creditors and your outstanding salary so your
current liability is 35,000 now your current ratio of the given company is
going to be your current asset divided by your current liability so your
current asset you know goes down to 22.14 let’s see an
example of a current ratio of colgate now in case of the Colgate’s current
ratio example what we can see is Colgate’s total current asset from
December 10th December 2013 we have the data 3730
4402 4556 and 4822 and
the total current liabilities is right visible to us if we just divide this 2
and we get your current ratio is 1 X 1.1X 1.22 X and 1.08X so this is something how it has been calculated as you can see the
current assets upon current liabilities in all the cases and see the data right
in front of us let’s understand the explanation part of
the current ratio formula see the current ratio is calculated because the
investor wants you to know how liquid the firm is right and it is one of the
most you can say that it is one of one one of the liquidity ratio that are very
you know you can say easy to calculate and it also gives a very quick idea
about the liquidity of the of the company so to calculate the current
ratio all we just need as current assets and current liabilities now our current
assets basically includes all assets that can be liquidated within year of a
time span or from now so if an asset cannot be liquidated within a year it
wouldn’t come under the current asset and it is similar to the case of current
liabilities and if the liability cannot be paid off within 1 year of time span
we cannot consider it under the current liabilities
so let’s bifurcate some things current assets and current liabilities let’s see
some of the ingredients included inside this in current assets you have cash and
cash equivalents then you have something that is called investments accounts
receivable which is also known as your debtors right
that is a trade debtors or account receivables you have something that is
called called as the no notes that is receivable which is maturing in 1 year
remember one thing everything that matures in 1 year is included in year
current assets any other debtors or receivables if any inventory now
inventory over here includes your raw material WIP walk in progress as well as
the finish codes any other you can see is supplies
and you have prepaid expense finally you have any advance payments
right in case of the or increase of your current liability you have your accounts
payable that is your creditors you have any
deferred revenue then you have any accrued compensation
any other accrued expenses that are involved any other accrued you can say
income or accrued income tax you can see any accrued income taxes
that goes in or any short-term notes if any and the current portion of the
long-term debt now what exactly is the use of the current ratio formula see Y
is the ratio is called liquid ratio since because it has two components the
current assets and current liabilities through this ratio we look at whether
the form has enough current assets to pay off its current liability it means
that we put it all the current assets of the company whether the company would
have enough cash to pay off its current liability
therefore if a company has more current assets and less current liability it’s
great for it’s a great position on for a company to be in any terms of the
liquidity so as an investor you don’t know whether the company has enough
current assets to pay off its current liability and that’s why you need to use
this ratio then once the investor finds out that this ratio of the company he or
she needs to go ahead and look at the ratios of the similar companies okay
under the same industry and then he or she should check whether the current
ratio of the target company is appropriate now for currently sure
example let’s say if if company a is the investor investors target company he or
she will first look at the current ratio offer off of Company A let’s say it is a
three okay we are just taking a number let’s say it is three and he will look
at the ratio of other companies under the same or the similar industry to
check whether the whether the these ratio of the target company is in the
desired range now view is the calculator of current assets and liabilities let’s
say your current asset is 1 lakh or 1 million and your current liability is
let’s say 2 million so that comes down to your working capital formula is it is
negative so higher the current assets it’s it’s better the working capital no
healthiness is really good so you can change the data accordingly and try to
analyze and put your own interpretation into the same if you have learnt and you
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