Financial Ratios Part 1 of 21: The Current Ratio
The Current Ratio can help determine how much of a business’ current liabilities can be covered if it were to liquidate current assets.
Financial Ratios can assist in determining the health of a business. There is a minimum of 21 different ratios that can be looked at by many financial institutions. You cannot look at a single ratio and determine the overall health of a business or farming operation. Multiple ratios must be used along with other information to determine the total and overall health of a farming operation and business. This series of articles will look at 21 commonly used ratios.
The Current Ratio is a measure of liquidity and is determined based on information derived from a business’ or farm operations balance sheet. The term liquidity refers to the ability of a business or farm operation to meet their financial obligations of debt payments, taxes and family living expenses. The Current Ratio specifically measures the extent to which current farm assets would pay a business’ or farms’ current liabilities (loans, accounts payable, etc.…) through the sales of its current assets.
To determine the Current Ratio you divide the Total Current Assets by the Total Current Liabilities.
Current Ratio =
A ratio of 1.5 would mean that for ever $1.00 a business or farm operation owes in current liabilities it has a $1.50 in current assets (if liquidated) to pay for those current liabilities.
If you have any further question please feel free to contact your local Farm Management Educator or the author.
Information for this article has been modified and gathered using material created by the University of Minnesota Center for Farm Financial Management (CFFM).
You can read the other articles in this series:
Part 2: Working capital.
Part 3: Working capital to gross revenues
Part 4: Debt-to-asset ratio
Part 5: Equity-to-asset ratio
Part 6: Debt-to-equity ratio
Part 7: Net farm income
Part 8: Rate of return on assets
Part 9: Rate of return
Part 10: Operating profit margin
Part 11: The EBITDA measurement of profitability
Part 12: Operating profit margin
Part 13: Capital debt repayment margin
Part 14: Replacement margin
Part 15: Term debt coverage
Part 16: Replacement margin coverage ratio
Part 17: Asset turnover rate
Part 18: Operating-expense ratio
Part 19: Depreciation-expense ratio
Part 20: Interest-expense ratio
Part 21: Net income ratio