The current ratio is a buzzing word nowadays among research analysts and the finance industry. It is a popular metric to measure a company’s current liquidity. Excel is an excellent tracking and analysis software that can track assets and liability records. And calculate the current ratio. In this article, we will be going over the current ratio and then how to calculate it in Excel.
Download Practice Workbook
You can download the workbook used for the demonstration below. It contains examples of calculating the current ratio in Excel.
What Is Current Ratio?
The current ratio is a measurement of the short-term liquidity of a company. It is also known as the working capital ratio. The ratio measures a company’s ability to meet short-term obligations. It also helps to access how a company can maximize its current assets for current debts and payables. Mathematically, it is the ratio of the current assets of the company and the current liabilities.
Current assets may include cash or its equivalents, stock or inventory, accounts receivable, liquid assets, etc. While accounts payable, note tax payable, owed income tax, short-term debts, etc. are considered current liabilities.
An average or slightly higher current ratio is generally acceptable by investors and analysts. Whereas a lower ratio indicates a risk of distress in the organization. Meanwhile, a very low current ratio indicates a risk of bankruptcy, and a very high current ratio when compared with its equivalent groups indicates the lack of efficient management of the company’s assets.
A current ratio between 1.5 to 3 is considered a healthy liquidity ratio. Below 1 indicates a risk. Although it isn’t always the case. Especially, when there are other sources of financing for the company. However, the ratio above 3 indicates improper management of the assets. Generally, this means the company is leaving excess cash unused instead of investing in growing the business.
Example of Current Ratio
Let’s look at two giants with their liquidity ratios for 2021. First, consider Walmart. The company has a total liabilities of $164.965B in 2021. On the other hand, Walmart’s total assets for 2021 were $252.496B. So the current ratio is 252.496B/164.965B= 1.53. This is an example of a healthy liquidity ratio.
Now let’s consider Nokia’s assets and liabilities for 2021. Nokia’s current assets were $23.185B in 2021. On the contrary, the current liabilities were reported as $25.16B in 2021. So the current ratio of the company is 0.92. Which is lower than 1.
So when it comes to financial superiority, investors and analysts would consider Walmart over Nokia. Because it indicates the former is better positioned to pay off obligations.
Then again, consider Microsoft with $153.922B of current assets and $88.65B of current liability. It has a current ratio of 1.74. Which is higher than the above two. And clearly will be more preferred when it comes to settling each dollar on their loan.
2 Suitable Examples to Calculate Current Ratio in Excel
To calculate the current ratio in Excel we need to assess the balance sheet of the particular organization first. We can determine the current assets and current liabilities of the organization from the balance sheets by using the SUM function. Then we can use the division formula to find out the current ratio by dividing these values.
Let’s consider two balance sheets for two organizations. The first one belongs to a sample corporation A. The balance sheet looks something like this.
The second one belongs to a sample of real estate holdings. The balance sheet of the company is as follows.
We are going to calculate the current ratio for both of these companies.
1. Calculating Current Ratio of a Corporation
To calculate the current ratio, the main goal is to determine the assets and liabilities to determine the ratio. For more details to determine the current ratio in Excel, follow these steps.
- First, select cell C9.
- Then write down the following formula.
- Now press Enter on your keyboard. You will have the total current assets of the company.
- Next, select cell F9.
- Now write down the following formula in the cell.
- Then press Enter on your keyboard. You will have the total current liabilities now.
- To calculate the current ratio, let’s select cells B11 and C11 and modify them first.
- Then select cell C11 and write down the following formula.
- Finally, press Enter and you will have your current ratio of the corporation.
2. Calculating Current Ratio of Real State Holdings
Similarly, we can calculate the current ratio for the later company.
- First, select C8 and write down the following formula.
- Then press Enter on your keyboard. Thus you will have the total current assets of the organization.
- Now select cell F7 and write down the following formula in it.
- After that, press Enter on your keyboard. As a result, you will have the total current liabilities of the company.
- Next, let’s prepare the cells B10 and C10 for the current ratio calculations like above.
- Once done, select cell C10 and write down the following formula in it.
- Finally, press Enter. Consecutively, you will have the current ratio of the real estate holdings.
And this is how to calculate the current ratio in Excel.
Read More: Debt Service Coverage Ratio Formula in Excel
Interpretation of Current Ratio
In our examples, the current ratio calculated from the balance sheets is 2.096 for corporation A and 0.81 for the real estate holdings.
From the current ratio discussed above, we can now say that corporation A has a healthy liquidity ratio. On the other hand, real estate holdings’ 0.81 is a bit on the lower side, which indicates it needs more financing. The first organization will be more likely to pay out its loans and debts than the latter. Also when it comes to investing, the first organization will be the safer choice as it has higher short-term solvency.
That concludes the article on how to calculate the current ratio in Excel. Hope you have found this guide helpful and informative and that you will be confident in your abilities to calculate the current ratio in Excel. If you have any questions or suggestions let us know below.
For more guides like this, visit Exceldemy.com.
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