iXERP Current Ratio is one of the standard financial ratios that are automatically calculated in iXERP Dashboard and extremely important for businesses, iXERP gives you a complete dashboard that include several financial ratios like “Current Ration”
What is “Current Ratio”
The current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations or those due within one year.
It is very important for investors and financial institutes like banks when they analyse company financial performance to give loans or credit facility, It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables.
- The current ratio compares all of a company’s current assets to its current liabilities. These are usually defined as assets that are cash or will be turned into cash in a year or less, and liabilities that will be paid in a year or less.
- The current ratio is sometimes referred to as the “working capital” ratio and helps investors understand more about a company’s ability to cover its short-term debt with its current assets.
- Weaknesses of the current ratio include the difficulty of comparing the measure across industry groups, overgeneralization of the specific asset and liability balances, and the lack of trending information.
How Current Ratio is calculated
To calculate the ratio, analysts compare a company’s current assets to its current liabilities.
The Current assets listed on a company’s balance sheet include cash, accounts receivable, inventory and other assets that are expected to be liquidated or turned into cash in less than one year.
Current liabilities include accounts payable, wages, taxes payable, and the current portion of long-term debt.
Current Ratio= Current liabilities / Current assets
iXERP Calculate the Current Ratio while you enter your actual data on the system, and make it available for you in the front dashboard.
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Current Ratio interpretation
A ratio under 1 indicates that the company’s debts due in a year or less are greater than its assets (cash or other short-term assets expected to be converted to cash within a year or less.)
On the other hand, in theory, the higher the current ratio, the more capable a company is of paying its obligations because it has a larger proportion of short-term asset value relative to the value of its short-term liabilities. However, while a high ratio, say over 3, could indicate the company can cover its current liabilities three times, it may indicate that it’s not using its current assets efficiently, is not securing financing very well, or is not managing its working capital.