Current Ratio (CuR)
Current Ratio (CuR)
The Current Ratio (CUR) is a model or a method used to measure the liquidity of a company by comparing all current assets to all current liabilities.
It is an indicator of a company's ability to meet short-term obligations and a 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.
If current liablities exceed current assets, then the company may have problems meeting its short-term obligations.
Formula for the Current Ratio CUR
Current Ratio = ----------------------
Inventory + Accounts Receivable
+ Cash Equivalents + Cash
Accruals + Accounts Payable
+ Notes Payable
Values of the Current Ratio CUR
The higher the ratio, the more liquid the company is.
Example how the Current Ratio CUR is calculated
If a corporation has has $50 million in current assets to cover $50 million 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 2. This means the company has twice as many liquid assets as liabilities.
Disadvantages of using the Current Ratio CUR
A thing to remember when using the CUR is that it ignores timing of both cash received and cash paid out. We can explain this using a simple example.Let's assume a company with no bills due today, but it has a lot of liabilities that are due tomorrow. The company also owns a lot of inventory (part of its current assets). However the inventory cannot be easily converted into cash. It takes some time to sell it. This company may show a good current ratio but can not be considered as having a good liquidity.
This ratio is also known as the working capital ratio and real ratio.
Is there any other ratio related to this metric?
Yes, financial professionals have developed a wire array of financial ratios and metrics that are used to analyze financial statements, for example the following:
Return On Assets (ROA),
Return on Investment (ROI),
Return On Equity (ROE),
Free Cash Flow (FCF),
Quick Ratio (QuR),
Cash Asset Ratio (CAR),
or the Capital Adequacy Ratio (CAR).