Current Ratio Calculator

How to Use the Calculator:

1. If you are in the 'Home' page, please Click on the post title to enter the 'Post Page' and proceed.
2. Please Wait for the game/ excel sheet to load - it may take a minute depending on the speed of your internet connection.
3. Please enter your values for current assets and liabilities.
4. Please input your values only in the designated cells (filled with yellow) in the excel sheet. All other cells are protected and are not intended to be altered.
5. To clear the contents of the designated cells please refresh the page.
6. This current ratio calculator is currency neutral - that is it can be used for any currency.

What are Current Liabilities?

Meaning:

Current liabilities are financial commitments that mature within an year. In other words they are short-term in nature. Creation of such commitments is natural in the process of conduct of business. A business that offers credit to its customers is also forced to buy its raw materials on credit.

Looking from the angle of financing or funding a business operation, current liabilities are a crucial source of funding the current assets.

Current liabilities are paid off out of trade collections – in other words by realizations of current assets like inventory and receivables.

Current liabilities are the second component in the calculation of the important liquidity ratio – current ratio – it forms the denominator of the formula.

Examples:

1. Trade or supplier or vendor payables
2. Short-term bank borrowings in the form of cash credits, bill discounting facilities, factoring arrangements, etc.
3. ‘I Owe You’ or IOUs
4. Tax dues

Significance:

It goes without saying that a business should possess adequate current assets, which can be quickly converted into cash, to be able to honor current liabilities on time. The recommended proportions being:

1. Total current assets shall be at least double the total current liabilities
2. Quick current assets namely cash, bank balances and receivables shall be at least equal to total current liabilities

Inability to meet current liabilities on time indicates lack of liquidity and an organization in such a condition is termed as sick.

Since current liabilities have a short maturity, they should not be used as source to fund long-term assets, say fixed assets. Such a misuse is called diversion of working capital that could result in the business becoming sick and therefore is viewed as a serious violation of financial norms by banks and financial institutions.

What are Current Assets?

Meaning:

The current means present, immediate, recent and so forth. Therefore, current assets are those assets that are meant and expected, to be converted into cash in an operating cycle quickly or immediately. In the accounting parlance one year is the accepted time period. Therefore all the assets that are expected, to be converted into cash within a year are called current assets.

On the other hand assets that are meant to be held for a long period or for period exceeding one year are called fixed assets or non-current assets.

Examples of current assets:

1. Cash and bank balances
2. Trade receivables also called sundry debtors
3. Inventories or stocks of raw materials, semi-finished and finished goods, consumables, spare parts, etc.
4. Temporary loans and advances that will either be returned or charged to expenses within a year, etc.

Examples of Various Current Assets

Importance/ Significance:

Holding adequate current assets in various forms is both inevitable as well as mandatory for the smooth and uninterrupted operations. Additionally, holding adequate current assets is vital for the liquidity of the organization, meaning ability to make timely payments to suppliers and meeting expenses. Employing adequate current assets thereby improves the current ratio - another important financial indicator.

Having emphasized the need for adequate current assets for the short term health of the company, excess current assets is not a good sign, indicating inefficiency of the operations.

Current Ratio - Formula

Current Ratio Formula:

Formula for Calculation of Current Ratio

Meaning:

Current Ratio is the ratio or proportion between current assets and current liabilities. Current assets mean assets that can be expected to get converted into cash within a year and current liabilities are those that mature within 12 months. It is a measure of the business’s liquidity or the ability to meet short-term obligations.

Desirable Number:

Current ratio of two is minimum stipulated. Any number above means additional safety. A number below 2 indicates weakness.

Example:

Here we present the example of calculating the current ratio of NMDC Ltd., as per the balance sheet on 31st March 2015.

Example Showing Current Ratio Calculation of NMDC Ltd.