What Is The Equation For Current Ratio?

Current ratio is the ratio obtained by dividing the total current assets of a company by its total current liabilities. For example, if a company, for example, called XYZ Co. has total current assets worth £10, 000, 000 and total current liabilities worth £8, 000, 000, the current ratio will be calculated by dividing the current assets of XYZ Co., that is £10, 000, 000 by its current liabilities, that is £8, 000, 000. That means the current ratio amounts to £10, 000, 000 /£8, 000, 000, which is 1.25 times.

The higher the current assets are worth vis-à-vis the current liabilities, the better. The most ideal current ratio is when the value of current liabilities is half the value of the current assets. In other words, if the current assets and current liabilities are in the ratio of 2:1, it indicates a good, strong financial position in the short-term.

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