Current ratio

What is the current ratio?

The current ratio is a financial ratio that measures a company's ability to pay its short-term obligations with its current assets. The current ratio is calculated by dividing a company's current assets by its current liabilities. A company's current assets are its cash and assets that can be converted into cash within one year. A company's current liabilities are its debts and other obligations that are due within one year. A company's current ratio can be improved by either increasing its current assets or decreasing its current liabilities.

How is the current ratio calculated?

The current ratio is calculated by dividing a company's current assets by its current liabilities. A company's current assets are its cash and assets that can be converted into cash within one year. A company's current liabilities are its debts and other obligations that are due within one year.

What is a good current ratio?

A good current ratio is typically considered to be between 1.5 and 2. A current ratio below 1.5 may indicate that a company is having difficulty meeting its short-term obligations. A current ratio above 2 may indicate that a company is not using its assets efficiently.

What is a bad current ratio?

A bad current ratio is typically considered to be below 1. A current ratio below 1 may indicate that a company is having difficulty meeting its short-term obligations.

How can the current ratio be improved?

The current ratio can be improved by either increasing a company's current assets or decreasing its current liabilities. A company can increase its current assets by generating more cash or converting more of its non-cash assets into cash. A company can decrease its current liabilities by paying off its debts or reducing its other obligations.

What are the implications of a high current ratio?

A high current ratio may indicate that a company is not using its assets efficiently. A high current ratio may also indicate that a company is hoarding cash and not investing enough in its business.

What are the implications of a low current ratio?

A low current ratio may indicate that a company is having difficulty meeting its short-term obligations. A low current ratio may also indicate that a company is not generating enough cash or converting enough of its non-cash assets into cash.

How does the current ratio affect shareholders?

The current ratio affects shareholders because it is a measure of a company's ability to pay its short-term obligations. If a company has a low current ratio, it may have difficulty meeting its obligations, which could lead to the company defaulting on its debt or declaring bankruptcy. This could result in the shareholders losing their investment in the company.

How does the current ratio affect creditors?

The current ratio affects creditors because it is a measure of a company's ability to pay its short-term obligations. If a company has a low current ratio, it may have difficulty meeting its obligations, which could lead to the company defaulting on its debt or declaring bankruptcy. This could result in the creditors losing their investment in the company.

What are some real-world examples of companies with high and low current ratios?

Some real-world examples of companies with high current ratios are Google, Apple, and Microsoft. These companies have large amounts of cash and other assets that can be quickly converted into cash. Some real-world examples of companies with low current ratios are General Motors, Ford, and Chrysler. These companies have large amounts of debt and other obligations that are due within one year.

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