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The Current Ratio (CUR) method is a
model for measuring the liquidity of a company by calculating the
ratio between all current assets and all current liabilities. It is an
indicator of a company's ability to pay short-term obligations.
For the Current Ratio formula,
see the picture on the left.
This ratio is also known as the
working capital ratio and
real ratio and is the standard measure of a
business' financial health. It will tell us whether a business is able to
meet its current obligations by measuring if it has enough assets to cover
its liabilities.
For example, if a corporation
has has M$50 in current assets to cover M$50 in current liabilities, this
means it has a 1:1 current ratio.
What is an acceptable
current ratio?
This varies by industry. Generally
speaking, the more liquid the current assets, the smaller the CUR can be without cause for concern. For most industrial companies, 1.5
is an acceptable CUR. A standard
CUR for a healthy business is close to two, meaning it has twice
as many assets as liabilities.
A thing to remember when using the CUR is that it ignores timing
of both cash received and cash paid out.
Take the example of a company with no
bills due today, but lots of
bills that are due tomorrow. The company also owns a lot of inventory (as
part of its current assets). However the inventory will only be sold in
the longer term. This company may show a good current ratio, but can not be considered as having a good
liquidity.
Book: Steven M. Bragg - Business Ratios and Formulas : A Comprehensive
Guide - 
Book: Ciaran Walsh - Key Management Ratios -
Compare also: Quick Ratio |
Cash Ratio |
Z-Score |
Discounted Cash Flow |
Free Cash Flow |
Economic Value Added |
Economic Margin |
CFROI
| Return on Invested Capital
More financial ratios
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