Formula

Current Ratio=Current Asset/Current Liabilities

Description

Current Ratio is the formula to measure the ratio between current asset over current liabilities.The outcome of this formula is the higher the better.Current ratio for different industry companies can be vary in high range. For examples, IT companies tends to have higher current ratio compared to manufacturer.The best way for comparision between current ratio is to compare with the competitor instead of other companies in other industry. For conservative measurement, a healthy company in financial perspective should have a least 2 current ratio, which mean current asset is 2 times higher than current liabilities.For those companies that have current ratio less than 1, it is dangerous for this company if it is requested to clear all the current liabilities in a financial crisis.

Example

If Company A has total 1.5 mil of current asset and 0.5 mil of current liabilities,
Current Ratio = Current Asset / Current Liabilities = 1.5 mil /0.5 mil = 3.
Company A has 3 times of current ratio.In a financial crisis, even company A is requested to return all the current liabilities,
1.5 mil - 0.5 mil = 1.0 mil,
it will still have 1.0 mil current asset to run its business.Hence, this company is healthy enough to face financial crisis.

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