Joshua is a graduate student at the USF. He has interests in business technology, analytics, finance, and lean six sigma.
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's current liabilities can be covered if it were to liquidate current assets.
The equation for the current ratio is displayed as:
Current Ratio = Current Assets / Current Liabilities
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 the company’s balance sheet is higher than current assets. See the illustration below for more specific definitions of possible outcomes.
The current ratio is one of many calculations that gives you some insight into the health of a business. It may not be 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.
Take for instance the company Amazon Inc. Amazon’s current assets and current liabilities for the 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 the fiscal year 2019 and is shown in the illustration below. With these figures, Amazon's current ratio is:
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96,334,000,000 / 87,812,000,000 = 1.097
Partial Amazon Fiscal Year 2019 Balance Sheet
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 may be 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
Amazon Current Ratio Line Graph
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.
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.
- 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