Don’t forget to share this post

Whether you’re an accountant, an investor, or a business owner, you probably spend quite a bit of time worrying about the state of the company’s health. One particular area of interest is the company’s liquidity: given its assets, can the business pay back its debt in time? Two frequently used liquidity ratios are the current ratio and the quick ratio. The current ratio divides current assets by short-term liabilities to indicate the company's ability to pay the latter using the former.

In this article, you will learn about the current ratio and how to use it. You will also learn how to add the formula to your spreadsheet to automatically perform current ratio calculations. Additionally, you will learn how tools like Google Sheets and Layer can help you set up a template and automate data flows, calculation updates, and sharing.

Layer google sheets add on offer
Get Started With Layer Today!

Share parts of your Google Sheets, monitor, review and approve changes, and sync data from different sources – all within seconds.

GET STARTED FOR FREE

Why is Current Ratio Calculated?

The current ratio is one of multiple financial ratios used to assess the financial health of a company. Specifically, the current ratio expresses a business’ ability to pay back short-term debt using only current assets. These include highly liquid assets like cash and marketable securities, but also less liquid assets, like inventory.

Current Ratio Calculation

You can calculate the current ratio - also known as the current asset ratio - by dividing current assets by current liabilities. This is easy to set up on a balance sheet template using tools like Excel or Google Sheets. Remember to only include current assets and liabilities in your total - no long-term investments or debt.

The data you need is in the company’s financial statements; the values for current assets and current liabilities are on the balance sheet.

Current Ratio Formula

To calculate a business’ current ratio, use the following formula:

current ratio = current assets / current liabilities
How To Perform What If Analysis in Google Sheets
How To Perform What-If Analysis in Google Sheets

The What-If Analysis is a very important concept in financial modeling. Here’s how to perform a What-If Analysis in Google Sheets.

READ MORE

What is a Good Current Ratio?

A current ratio between 1.5 and 3 is generally considered good. Since this ratio is calculated by dividing current assets by current liabilities, a ratio above 1.5 implies that the company can cover current liabilities within a year.

If the ratio is above 3, the company may be mismanaging or underutilizing assets. If the ratio is below 1, the company’s current liabilities are greater than its assets. This can cast doubt on the company’s liquidity and its ability to pay back short-term debt.

However, there are always exceptions, particularly as some accounting methods and financial strategies could result in abnormally high or low current ratios. For example, keeping a very tight inventory control or heavily reinvesting in the company can lead to lower current ratios. That’s why it’s important to consider multiple ratios and metrics in your analysis: to avoid drawing inaccurate conclusions.

Quick Ratio vs Current Ratio

Another popular liquidity ratio is the quick ratio. Unlike the current ratio - which weighs all current assets against current liabilities - the quick ratio focuses exclusively on quick assets. These assets can be converted into cash quickly, usually within 3 months.

Current Ratio Examples

If a company has current assets valued at $185,000.00 and its current liabilities total $103,000.00, the current ratio can be calculated as follows:

$185,000.00 / $103,000.00 = 1.796116505

A ratio of 1.8 would usually be considered a healthy current ratio.

However, if current assets are worth $56,000.00 and liabilities are $135,000.00:

$56,000.00 / $135,000.00 = 0.4148148148

A current ratio with a value of 0.41 is something that most investors would be concerned about, barring exceptional circumstances.

Break-Even Analysis: How to Calculate Break-Even Point

A break-even analysis is a financial calculation used to determine a company’s break-even point. Here’s how to calculate the break-even point step-by-step.

READ MORE
Break Even Analysis How to Calculate Break Even Point

How to Calculate the Current Ratio in Google Sheets?

Let’s say you want to calculate the current ratio for Company A in Google Sheets. The company has the data shown below on the balance sheet.

You can download the Balance Sheet template shown below.

Current Ratio Calculation Formula Examples Balance Sheet Data
Current Ratio: Calculation, Formula & Examples - Balance Sheet Data
  1. 1. In an empty cell, type in the ‘=‘ sign and click on the cell with the value for total current assets.
Current Ratio Calculation Formula Examples Add Current Assets
Current Ratio: Calculation, Formula & Examples - Add Current Assets
  1. 2. Add the ‘/‘ sign and click on the cell with the value for total current liabilities.
Current Ratio Calculation Formula Examples Divide By Current Liabilities
Current Ratio: Calculation, Formula & Examples - Divide By Current Liabilities
  1. 3. Press “Enter” to get the current ratio.
Current Ratio Calculation Formula Examples Current Ratio Value
Current Ratio: Calculation, Formula & Examples - Current Ratio Value

How to automate your FP&A on top of Google Sheets?

Layer is an add-on that equips finance teams with the tools to increase efficiency and data quality in their FP&A processes on top of Google Sheets. Share parts of your Google Sheets, monitor, review and approve changes, and sync data from different sources – all within seconds. See how it works.

Using Layer, you can:

  • Share & Collaborate: Automate your data collection and validation through user controls.
  • Automate & Schedule: Schedule recurring data collection and distribution tasks.
  • Integrate & Sync: Connect to your tech stack and sync all your data in one place.
  • Visualize & Report: Generate and share reports with real-time data and actionable decisions.

Limited Time Offer: Install the Layer Google Sheets Add-On today and Get Free Access to all the paid features, so you can start managing, automating, and scaling your FP&A processes on top of Google Sheets!

Conclusion

You now know how to calculate the current ratio and how to interpret its value. You also know how to add the formula to your financial statement spreadsheets to calculate it automatically. Using Layer, you can control the entire process from the initial data collection to the final sharing of the results. Automate the tedious tasks to focus on staying updated to make informed decisions.

As you have seen, the current ratio is one of various ratios commonly used by accountants and investors to evaluate a company’s financial health in terms of its liquidity. Another popular liquidity ratio is the quick ratio, which you can learn more about in our blog.

To learn more about other financial ratios and analyses, check out the articles below:

Layer google sheets add on offer
Get Started With Layer Today!

Share parts of your Google Sheets, monitor, review and approve changes, and sync data from different sources – all within seconds.

GET STARTED FOR FREE
Maria Del-Olmo
Originally published Oct 12 2022, Updated Nov 23 2022