This tutorial provides a comprehensive overview of the current ratio, which is a type of liquidity ratio. In this tutorial, we will learn how to calculate this ratio using a practical example. More importantly, using the Colgate Case Study, we'll learn how to interpret the current ratio.
Download the Colgate Excel Model Ratio Analysis Template: We will use an excel template for the analysis. You can download the ratio analysis template from this link - https://www.wallstreetmojo.com/ratio-analysis-template/
What is Current Ratio?
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The current ratio is a liquidity ratio that assesses a company's ability to repay short-term loans with maturities within a year.
Formula
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Current Ratio Formula = Current Assets / Current Liabilities.
Interpretation of Current Ratio
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- If Current Assets is greater than Current Liabilities (Ratio is greater than 1.0) - this indicates a desirable situation, i.e., the company has enough to meet its short-term obligations.
- If Current Assets = Current Liabilities (Ratio is equal to 1.0) - this indicates that the Current Assets are just enough to cover short term obligations.
- If Current Assets is less than Current Liabilities (Ratio is less than 1.0) - this indicates that the company does not have enough to meet its short-term obligations.
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