What is Current Ratio? How to calculate?
Posted on October 5, 2009
Filed Under Stock Basic | 1 Comment
What is Current Ratio?
The current ratio is a method to measure about the current company short term financial strength. It’s most popular gauge of a company’s ability to pay its short-term bills. A company’s current ration of 2:1 or exceeds 1 is able to deal with some unexpected expenses, opportunities and short term obligation.
For Example,
A company called COMP-A, with current assets of $200,000 and current liabilities of $100,000. The COMP-A company’s current ratio is 2:1 or 2 , with current assets / current liabilities.
Current Ratio = Current Assets ($200,000) / Current Liabilities ($100,000)
How to Calculate Current Ratio ?
Current Ratio = Current Assets / Current Liabilities
Current Assets = Things that used up usually within one year, and replenished frequently, such as : cash, inventory and so on.
Current Liabilities = Things that usually due within one year, such as goods , services or supplies that were purchased for use within a short period.
High Current Ratio?
A company has a high current ratio like 3 or 4, usually means that management has much cash on hand, and not doing much in investment. With so much cash on hand, high chance this company will issue dividend to it’s shareholders.
Low Current Ratio?
A company has a low current ratio like 0.5 or less than 1. It may have some difficulties meeting the current obligations, however this is not indicate a critical problem, if a company has a very long-term prospects. Just be careful and take a close look at the company financial report to make sure there are no liquidity issues.
So…What is the reasonable current ratio?
Acceptable current ratio varies by industry, but the reasonable current ratio is usually between 1.5 and 2.5. Just take this as measurement for the company short term financial strength.
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One Response to “What is Current Ratio? How to calculate?”
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If he doesn’t know what he is doing, mutual fund is the way to go. That might be counted as cheating in the class though.