Liquidity ratios are important financial metrics that can determine whether a company can pay off its short-term debts without having to raise more capital. One of these ratios is the current ratio, which can help business owners understand whether they can assume more debt to fuel their growth. Using Microsoft Excel is one of the easiest ways to do so, as long as you have some key information from your financial statements. In this article, we explore the current ratio, how to determine it, and how to calculate it using Excel.

What Is the Current Ratio?

The current ratio is a financial metric used by the finance industry. Also known as a liquidity ratio, it is used to assess a company's short-term 澳洲幸运5官方开奖结果体彩网:liquidity.

A company's current ratio reflects a company's ability to generate enough cash to pay off all debts should they become due at the same time. While this scenario is highly unlikely, the ability of a business to 澳洲幸运5官方开奖结果体彩网:liquidate assets qܫuickly to meet obligations is indicative of its overall financ⛄ial health.

Although lower ratios may indicate a reduced ability to meet obligations, there are no definitive rules when it comes to a good or bad current ratio. For instance, if a company has a current ratio of 2, it means its assets equal twice its liabilities.

Calculating the Current Rati🐈o in Microsoft Excel

Getting Started

This ratio is a simple conc🧸ept that requires only two piece💛s of data to compute:

• Current assets. These are assets that can be liquidated quickly and easily. They include assets that take the form of cash or 澳洲幸运5官方开奖结果体彩网:cash equivalents, such as stocks or other 澳洲幸运5官方开奖结果体彩网:marketable securities.
• 澳洲幸运5官方开奖结果体彩网:Current liabilities. These are short-term financial obligations. As such, these debts become due within the next year.

To determine the ratio, you'll need to divide the current assets by the current liabilities. The result (the current ratio) reflects the degree to which a company's short-term resources outstrip its debts.

Using Microsoft Excel

Calculating total current assets and total current liabilities may not be overwhelming for very 澳洲幸运5官方开奖结果体彩网:small businesses. But, as businesses grow, the number and types of debt and income streams can become greatly diversified. Microsoft Excel provides numerous free accounting templates that help to keep track of 澳洲幸运5官方开奖结果体彩网:cash flow and other pr⛎ofitabili𝔉ty metrics, including the liquidity analysis and ratios template.

Once you determine your asset and liability totals, calculating the current ratio in Excel is very straightforward, even without a template. You can do this by inputting your current assets and current liabilities into adjacent cells, say B3 and B4. In cell B5, input the formula "=B3/B4" to divide your assets by your liabilities, and the calculation for the current ratio will be displayed.

Example of Calculating the Current Ratio in Excel🦹

Let's say that a small business owner wants to expand and needs to determine his ability to take on more debt.

Before applying for a loan, they want to be sure he is more than able to meet his current obligations. They also want to see how much new debt they can take on without overstretching their ability to cover payments. But, they don't want to rely on additional income from theꦓ expansion. That's why it's important💯 to be sure the company's current assets can handle the increased burden.

After consulting the 澳洲幸运5官方开奖结果体彩网:income statement, the owner determines that their current assets for the year are $150,ᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ000, and their current liabilities clock in at $60,000. Using the instructions above, they can input the data into an Excel spreadsheet to determinཧe their current ratio: 2.5.

Since the business🎃 has such an excellent ratio already, the owner can take on at least an additional $15,000 in loans to fund the expansion without sacrificing liquidity.

The Bottom Line

The current ratio can tell you a lot about a company's ability to meet its short-term financial obligations. If you want to calculate it, you can use Excel by inputting the data and formula that we mentioned above. Just make sure you have the company's current assets and current liabilities, which can be found on the balance sheet. Just make sure you're comparing companies from the same industry if you're trying to determine the viability of several investments.