2017-03-29 00:00:00 Cash Flow English Learn what the current ratio is and why it is important for business. Also learn the ratio's formula, and see a sample calculation. https://d1bkf7psx818ah.cloudfront.net/wp-content/uploads/2017/06/08213915/Accountant-Explaining-Nuances-Current-Ratio.jpg What is the Current Ratio?

What is the Current Ratio?

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As a business owner, it’s important to know if your business can pay its short-term and long-term obligations. To measure this, use the ratio that is most commonly used in the business, the current ratio. The current ratio shows a business’s ability to meet its current liabilities with its current assets. The reason this is so important is because a business can convert its current assets into cash within a year or less and current liabilities are what a business owes within a year or less. The higher the ratio, the strong the position a company is in. The formula for the current ratio is: Current ratio = current assets / liabilities. To illustrate, if a company has $500,000 in current assets and $250,000 in current liabilities, the equation expressing its current ratio is: $500,000 / $250,000 = 2. The current ratio is an important measure for any business, since it indicates a company’s financial health. A very low current ratio signals that the company may be experiencing financial troubles. A current ratio of less than 1 shows that liabilities due within the next 12 months are higher than the company’s current assets. This can be a major warning sign for investors, banks, or other financial institutions. While a low current ratio shows that a company’s financial health is bad, it doesn’t necessarily mean that the company can’t recover. Likewise, a current ratio higher than 3 often indicates that the company is not utilizing its current assets to the best of its ability.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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