# 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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