The current ratio is a measure of a company's ability to pay its short-term debts and obligations. The current ratio is very important in determining whether or not a company's financial condition is healthy. In general, a current ratio of 2:1 means that the company's current assets are twice as large as current liabilities so that the company's financial condition can be considered healthy. A current ratio of 1 means that the company's assets and debts are equal so it can be considered quite healthy. A lower ratio indicates an indication of the company's inability to pay its debts.
Step
Method 1 of 2: Understanding the Current Ratio
Step 1. Know the meaning of current debt
The term "current debt" is often used in accounting to describe a company's debt that must be paid in cash within one year or in the company's operating cycle. This debt must be paid by current assets or by drawing on new current debt.
Current liabilities consist of short-term loans, trade payables, payables to vendors, and payables that must be paid in advance
Step 2. Know the meaning of current assets
The term "current assets" describes the assets used to pay the company's liabilities and debts in one year. Current assets can also be converted into cash.
Current assets consist of accounts receivable, merchandise inventory, marketable securities, and other easily liquidated assets
Step 3. Know the basic formula for the current ratio
The formula for calculating the current ratio is very simple: current assets divided by current liabilities. All the numbers you need to calculate the current ratio are on the company's balance sheet.
Method 2 of 2: Calculating Current Ratio
Step 1. Calculate current assets
To calculate the current ratio, you must first calculate the current assets of the company. For that, subtract non-current assets from total assets.
As an illustration, let's say that you are calculating the current ratio of a company with total assets of Rp. 120 million, own capital of Rp. 55 million, non-current assets of Rp. 28 million, and non-current debt of Rp. 26 million. To calculate current assets, subtract non-current assets from total assets: IDR 120 million – IDR 28 million = IDR 92 million
Step 2. Calculate the total debt
After calculating the company's current assets, you must calculate the total debt. For that, subtract own capital from total assets.
To calculate the total debt with the example above, subtract the equity from the total assets: IDR 120 million – IDR 55 million = IDR 65 million
Step 3. Determine the amount of current debt
Once you know the total debt, you can calculate current debt. For that, subtract non-current debt from total debt.
To calculate current debt with the example above, subtract non-current debt from total debt: IDR 65 million – IDR 26 million = IDR 39 million
Step 4. Calculate the current ratio
After determining the amount of current assets and current liabilities, enter these numbers into the current ratio formula, namely current assets divided by current liabilities.
Using the example above, divide current assets by current liabilities: IDR 92 million / IDR 39 million = 2,358. Your company's current ratio is 2,358 as an indicator of a very satisfactory company's financial condition
Tips
- You can use other names for the current ratio, namely “liquidity ratio,” “cash asset ratio,” and “cash ratio.”
- The higher the current ratio, the better the company's ability to pay debts.
