Stuck with an Assignment on Current Ratio?

Current Ratio

A current ratio is a popular metric that is used in various industries to assess the short-term liquidity of a company with respect to its available assets and pending liabilities. This is a crucial topic in the subject of accounting and finance (also for business studies students). If you are willing to learn more about this topic, MyAssignmenthelp.com is the right place for you.

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What Is the Current Ratio?

The current ratio also referred to as the working capital ratio, measures the capability of a business to meet its short-term obligations that are due within a year. The ratio checks the weight of total current assets against total current liabilities. It helps determine the financial health of a company with the help of this ratio and helps understand how it can maximize its current assets to settle debt and payables.

If you do not know how to calculate the current ratio, you need to learn the current ratio formula first. The current ratio formula can be presented in the following manner:

Current Ratio = Current Assets / Current Liabilities

An example of the current ratio formula may help you understand it better.

Let’s say, a business holds the following things –

Cash = $10 million

Marketable securities = $15 million

Inventory = $25 million

Short-term debt = $10 million

Accounts payable = $15 million

Current assets = 10 + 15 + 25 = 50 million

Current liabilities = 10 + 15 = 25 million

Current ratio = 50 million / 25 million = 2.0x

According to the calculation, the business currently has a current ratio of 2. It means it can settle each dollar on loan or accounts payable twice as easily. When the rate is more than 1, it suggests that the financial health of the company is good. However, a very high current ratio signifies that the business is leaving excess cash unused instead of investing it in the growth of the business.

A current ratio of 1.2 to 2 is considered good. It simply means that the business has two times more current assets than liabilities to cover its debts. If the current ratio goes below 1, it means the company does not have enough liquid assets to cover its short-term liabilities.

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What Is Liquidity Ratio?

The current ratio we just learned about is a type of liquidity ratio. A liquidity ratio helps you determine whether a business can pay off its debt when they become due. In simpler words, this ratio tells you how quickly a company can convert its current assets into cash so that it can pay off its liability on a timely basis.

Apart from the current ratio, there are several more ratios that fall under the liquidity ratio. All these ratios help get a clear picture of how financially sound a company is. The major ratios under the liquidity ratio are:

• Current ratio:Kindly refer to the previous section
• Acid test ratio or quick ratio: This ratio helps determine a company’s current available liquidity. The formula of this ratio is

Quick ratio = (current assets – inventory) / current liabilities

• Absolute liquidity ratio:This ratio evaluates marketable securities, cash and equivalents against current liabilities. The formula of this ratio is

Absolute liquidity ratio = (Cash and equivalent + marketable securities)/current liabilities

• Basic defence ratio: This ratio helps determine how many days a company can run its cash expenses without any financial aid from outside. The formula of this ratio is

Basic defence ration: Current assets/daily operational expenses

These are the major liquidity ratio formulas. However, if you need assistance on any other form of liquidity ratio formula for an assignment, simply get in touch with the academic experts at MyAssignmenthelp.com.

Is A High Current Ratio Good?

As mentioned previously, a current ratio of 1.2 to 2 is ideal for a business. While a lower current ratio is bad for the business, a higher current ratio also is not good for the business. It only suggests that the business is not putting all its assets and money into the right use.

However, if your business’s current ratio is lower than 1.2, you need to know how to increase the current ratio. Here are some tips that can help you achieve that goal:

1. Pay off current liabilities:

The current ratio of a business does not just depend on the current assets. It also relies on the current liability, which is the denominator. Make sure to pay off those liabilities as early as possible.  The ratio will automatically improve once you start paying off your liabilities.

2. Sell off the unproductive assets:

Interestingly, the cash levels increase when you sell your unused fixed assets. If there are assets that are not contributing to your business, they are simply blocking your money. It will be better if you sell them off and improve your current ratio.

3. Boost current assets by raising shareholder's funds:

Whenever the current assets are funded by equity instead of the creditors, the level of current assets usually increases with current liabilities remaining the same. Thus, it improves the current ratio.

4. Sweep bank accounts:

It is always advisable for firms to cut down on hard cash levels and keep the money in bank accounts. Currently, every bank and the financial institute offers the facility of seeping. It transfers the excess fund from the current account to another account which fetches interest on that fund. As the value of the current asset increases, the current ratio also increases.

Hopefully, these tips were useful for you if you are working on an assignment on the current ratio. However, you can hire our experts for further assistance with your assignments. We offer on-time delivery of orders at a reasonable price. Also, we offer free rework support for unfulfilled orders. Get in touch with us at any time you want.