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How to Calculate Current Ratio

Joshua is a graduate student at the USF. He has interests in business technology, analytics, finance, and lean six sigma.

The current ratio metric informs an organization whether they can pay their short-term debt obligations with their short-term assets.

The current ratio metric informs an organization whether they can pay their short-term debt obligations with their short-term assets.

What is the Current Ratio?

The current ratio is a financial ratio that can determine if a business can cover its current liability obligations with its current assets. The current ratio can help determine how much of a business’ current liabilities can be covered if it were to liquidate current assets.

The equation for current ratio is displayed as:

Current Ratio = Current Assets / Current Liabilities

Current Ratio Outcome

If the ratio is above 1, the portion of a company’s current assets is higher than that of the current liabilities. Furthermore, if the ratio is below 1, the portion of current liabilities on company’s balance sheet is higher than current assets. See the illustration below for more specific definitions of possible outcomes.

A good current ratio is said to be between 1 and 2. If the ratio goes out of this range adjustments should be made. Knowing the current ratio for an industry  can be a great benchmark for success.

A good current ratio is said to be between 1 and 2. If the ratio goes out of this range adjustments should be made. Knowing the current ratio for an industry can be a great benchmark for success.

The current ratio is one of many calculations that gives you some insight into the health of a business, though maybe not a definite determination of the health of a business. This ratio is described as a liquidity ratio and the data used to calculate it comes from the balance sheet. Since current assets are the most liquid of assets, when the current ratio is above 1, we can expect that there is a high (though not definite) probability that current liabilities (liabilities that are expected to be paid in one year or less) can be paid for with a company's most liquid assets.

Current Ratio Example

Take for instance the company Amazon Inc. Amazon’s current assets and current liabilities for fiscal year 2019 were $96,334,000,000 and $87,812,000,000 respectfully. This information can be found on Amazon’s balance sheet within their SEC filing for fiscal year 2019 and shown in the illustration below. With these figures, Amazon's current ratio is:

96,334,000,000 / 87,812,000,000 = 1.097

Partial Amazon Fiscal Year 2019 Balance Sheet

A partial Amazon Inc. balance sheet that was obtained from the Security and Exchange Commission's website.

A partial Amazon Inc. balance sheet that was obtained from the Security and Exchange Commission's website.

Current Ratio Analysis

By digging a little deeper you may be able to draw some more conclusions about the company. By looking at Amazon’s annual current ratio history we can conclude that their current ratio maybe on the rise. There is an expectation that it may remain near 1.09 or rise even higher. This type of observation can help analysts forecast for future current ratio outcomes for quarterly or annual statements.

Amazon Current Ratio History

The above illustration compares show's Amazon's historical current ratio for four fiscal years in a row.

The above illustration compares show's Amazon's historical current ratio for four fiscal years in a row.

Amazon Current Ratio Line Graph

A line graph is an excellent way to see if there is a trend forming in data.

A line graph is an excellent way to see if there is a trend forming in data.

Current Ratio Comparisons

Comparing the current ratio of Amazon to competitors in the same industry, Amazon can make strategic changes involving current assets and current liabilities to remain competitive. Analysts may also use these benchmarks to judge whether a current ratio is strong or weak.

The above illustration compares Amazon's current ratio with other current ratios in the ecommerce industry.

The above illustration compares Amazon's current ratio with other current ratios in the ecommerce industry.

Walmart has a small current ratio, but this may be due to fast inventory turns compared to accounts payable due dates. This situation may only occur for a strong company.

References

Amazon Inc., (2020, January 31). Amazon Inc 2019 10-K Filing. Retrieved September 27, 2020, from https://www.sec.gov/ix?doc=/Archives/edgar/data/1018724/000101872420000004/amzn-20191231x10k.htm

Amazon Inc., (2019, February 1). Amazon Inc. 2018 10-K Filing. Retrieved September 27, 2020, from https://www.sec.gov/Archives/edgar/data/1018724/000101872419000004/amzn-20181231x10k.htm

Amazon Inc., (2018, February 2). Amazon 2017 10-K Filing. Retrieved September 27, 2020, from https://www.sec.gov/Archives/edgar/data/1018724/000101872418000005/amzn-20171231x10k.htm

Ebay Inc., (2020, January 31). Ebay 2019 10-K Filing. Retrieved September 27, 2020, from https://www.sec.gov/ix?doc=/Archives/edgar/data/1065088/000106508820000006/ebay201910-k.htm

Walmart Inc., (2020, March 20). Walmart 2019 10-K Filing. Retrieved September 27, 2020, from https://www.sec.gov/ix?doc=/Archives/edgar/data/104169/000010416920000011/wmtform10-kx1312020.htm

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2020 Joshua Crowder