Current ratio is a number that helps show liquidity of a business or person, which can be used to determine their ability to cover short-term obligations with their current assets.
The formula for current ratio is rather simple.
Let's say you own a local paint store, your total assets total $350,000 while you have liabilities that amount to $250,000. Ratio = 350,000 / 250,000. The result will be a current ratio of 1.40.
Having a good current ratio can be important. What is generally considered good is a current ratio between 1.5 and 3.0, so yes, a current ratio of 1.5 can be considered good.
Current ratio should not be too high, if it is higher than 4 or 5, it may be a sign that your business is holding onto too much cash or assets where you could use them to maximize profits instead. This is all dependent on your industry, business model, and other factors. It is advised that you talk to a business accountant or similar professional to learn more about your businesses' current health.
Technically, current ratio can not be negative. This is because your assets value should always be over zero, if it is below zero it is not an asset making the calculations not correct.
Create Date: July 16, 2024
Last Modified Date: July 16, 2024
