Current ratio explained
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- เผยแพร่เมื่อ 21 ก.ค. 2024
- How to calculate the current ratio? And more importantly, once you have calculated the current ratio, how to interpret the current ratio? What does a #currentratio of 0.5, 1 or 2 mean? What is the story behind the numbers? How are some of the largest companies in the world performing on their current ratio? Find out all you need to know about the current ratio in this video. The current ratio is a key metric in #financialratioanalysis
⏱️TIMESTAMPS⏱️
00:00 Current ratio introduction
00:28 Current assets and current liabilities
01:44 Current ratio calculation
02:51 Current ratio interpretation
03:58 Current ratio examples
09:36 Current ratio benchmarking
How to calculate the current ratio? And more importantly, once you have calculated the current ratio, how to interpret the current ratio? What does a #currentratio of 0.5, 1 or 2 mean? What is the story behind the numbers? How are some of the largest companies in the world performing on their current ratio?
To calculate and interpret the current ratio, we first need to understand its components: current assets and current liabilities. Current assets and current liabilities are both groups of accounts on the balance sheet. A balance sheet is a picture at a point in time (usually the end of the year, or the end of the quarter) of what a company owns (on the left) and what a company owes (on the right). Asset accounts are grouped in either current assets or non-current assets, and liabilities accounts into current liabilities or non-current liabilities. Current assets are cash and other assets that are expected to be converted to cash within a year. Some examples of accounts in the Current Assets category: Cash, Accounts Receivable, Inventory, Prepaid Expenses. Current Liabilities are amounts due to be paid to creditors within twelve months. Some examples of accounts in the Current Liabilities category: Accounts Payable, Accrued Liabilities, Short Term Debt. So the difference between current and non-current assets is whether this asset will be converted to cash within one year. The difference between current and non-current liabilities is whether the amounts are due within one year, or further out.
Once we have found the Current Assets and Current Liabilities numbers on the balance sheet, we can calculate and then interpret the Current Ratio. The Current Ratio is simply the amount of Current Assets divided by the amount of Current Liabilities. If a company has a Current Ratio of 1, it means that every $ of Current Liabilities is covered by a $ of Current Assets on the date of the balance sheet. Remember that the balance sheet is a picture at a point in time. Based on the transactions and journal entries that happen between this balance sheet and the next balance sheet, the Current Ratio could move up or down significantly! Let’s say that on the next balance sheet, that is made one quarter later, the Current Ratio is 2. This means that every $ of Current Liabilities is covered by $2 of Current Assets on the date of the balance sheet. The opposite could also occur. Let’s assume the Current Ratio drops to 0.5. This means that every $ of Current Liabilities is covered by only $0.50 of Current Assets on the date of the balance sheet. The Current Ratio is a measure of short term liquidity. Can the company pays its bills? Most people (including suppliers and shareholders) would say that a Current Ratio of 1 or higher is good. However, is a Current Ratio of 2, 3 or 4 necessarily a good thing? The ability of a company to pay its bills would be very high, but a very high Current Ratio could also be a sign that a company is not putting its cash to much productive use. Maybe they should invest it in the business (new equipment, or more R&D spending), do an acquisition, or pay a dividend to its shareholders. Is a Current Ratio lower than 1 necessarily a bad thing? The ability of a company to pay its bills might be lower, but a Current Ratio below 1 could also be a sign that a company is very good at managing its working capital: keeping its receivables and inventory low, and its payables high. It’s the story behind the ratio and the numbers that is important.
Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investing decisions. Philip delivers #financetraining in various formats: TH-cam videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!
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Enjoyed the video? Then subscribe to the channel, and watch my video on financial ratio analysis next: th-cam.com/video/MTq7HuvoGck/w-d-xo.html
Done
As usually very clear explanation, thank you for sharing it. I feel the learning was never so easy before...
Thank you for watching!
@@TheFinanceStoryteller and love the voting!
Fantastic video! I Just subscribed! Keep making more! thank you
Happy to hear that! Yes, planning to make a lot more content...
Great video! thank you so much
Nice to hear that! Thank you for watching and commenting. :-)
Thank you so much, this has helped me a lot.
Glad it helped! I have some related videos on current assets and current liabilities th-cam.com/video/Jw4TaiP42P4/w-d-xo.html plus solvency and liquidity th-cam.com/video/z4zrQ3saMsI/w-d-xo.html that might be useful for you too!
Love your videos. Thanks for posting. better than my professor
Wow, thanks! Enjoy the videos, and please tell your fellow students about them. 😎
Thanks so much, very helpful
You're welcome, Kay! Thanks for watching.
Thanks dawg you a real one 👌
You're welcome. Thank you for watching and commenting!
Great video!!!!
Thank you, John!!!
Like your teaching. Very practical.
Yeah, let's keep it close to the real world! 😉
Well explained
Thank you very much! I think you will like my "financial ratio analysis" video as well: th-cam.com/video/MTq7HuvoGck/w-d-xo.html
Yesi...
Nice explanation
Thank you, Ajit!
Amazing teacher
Thank you for the kind words, Cicero!
So does this basically mean if you have a current ratio of 1 your breaking even. CR of 2 you have 50% more money after paying bills and .5 your behind on bills ?
It would put it slightly differently. The current ratio is a balance sheet ratio, so you are looking at the situation at a specific point in time (specific date), not taking into account the transactions that are likely to happen after it (generating new sales to customers, incurring new expenses, etc.). If on the balance sheet date, the current ratio is 1, then cash and other assets that are expected to be converted to cash within a year are equal to amounts due to be paid to creditors within twelve months. If the current ratio is 2, there is $2 owned for every $1 owed. If the current ratio is .5, then there is $0.50 for every $1 owed. You are not necessarily behind on your bills (all the invoices in accounts payable could be current, i.e. not past due), but the ability to pay what you owe when those invoices become due is low based on what you own. Suppliers and banks will be more careful doing business with a company that has a current ratio of 0.5 than with a company having a current ratio of 2.0.
What website or app did you use to get the information
In most cases, the annual report published on the investor relations sections of the company's website, and/or the 10-K filing by the company with the SEC.
hi sir, mayy I ask what's the difference between the current ratio and acid-test ratio?
The acid-test ratio compares a company's “quick assets” (cash and accounts receivable) to its current liabilities. The difference with the current ratio is that it excludes inventory (which might take some effort and time to convert to cash).
Thank you very much sir :))))
what about the amount restated ?Which one do we need to choose ?Restated Or Current amount?
Hi Aida! Not sure what you are referring to. I don't think any restated amounts are showing in this video?
Can someone explain unearned rev. please?
Hello Parker! I have a short video on unearned revenue (also called deferred revenue) for you: th-cam.com/video/SNguYyKrqL4/w-d-xo.html
Can give solution for increase current ratio
One example is to generate more cash from operating activities, and not pay it out a dividends to shareholders.
bro vere level explanation
Glad you liked it
1. Based on the figures below, what is the current ratio?
£
Inventory
6,000
Trade Payables
12,000
Trade Receivables
11,000
Long term borrowings (Non-current liabilities)
16,000
Current portion of long-term loans
3,000
Taxation payable (within one year)
5,000
Cash
1,000
A) 0.50:1
B) 0.60:1
C) 0.75:1
D) 0.90:1
Please help me to solve this questio .
Current ratio is current assets divided by current liabilities. You can learn in the examples in my video which items go into current assets, and which ones into current liabilities. Group the relevant items, and make the calculation.
@@TheFinanceStoryteller i cannot make .so thats why i am requesting youbto please solve this . I am cery weak in accounting.If u can solve this then i am able to solve other sums like this.
I will meet you halfway.... Below is how you should classify the various accounts, then you can follow the instructions in my previous comment to finish the calculation.
Inventory - Current Assets
Trade Payables - Current Liabilities
Trade Receivables - Current Assets
Long term borrowings (Non-current liabilities) - Out of scope, as this is in Non-current liabilities
Current portion of long-term loans - Current Liabilities
Taxation payable (within one year) - Current Liabilities
Cash - Current Assets