The current ratio is a quick indicator of solvency that helps investors to understand the financial situation. If the ratio is greater than 1, then the company has enough cash and liquid assets to cover its short-term debt obligations. The current ratio is one way of looking at liquidity because it measures how much money a company has in the bank relative to how much it owes.
Current ratio is calculated as current assets / current liabilities
- A current ratio below 1 means a company does not have enough capital to cover it’s short term obligations
- An ideal current ratio is between 1.50 and 3
- A too high current ratio may mean a company is not managing it’s working capital well
- Current ratio is not perfect as a company could have massive aged receivables with a large amount of bad debt and be completely insolvent but have an acceptable current ratio
To calculate the current ratio in Xero online accounts we run the balance sheet report
Export the balance sheet into Microsoft excel or google sheets and divide the current assets by the current liabilities
As Xero Accountants Dublin We can also create a report template in Xero which will automatically do this for you
