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What Is Current Ratio?

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What Is Current Ratio?

The current ratio measures a company’s ability to pay its financial obligations within the year. 

It is calculated by taking its current assets divided by its current liabilities.

Current Ratio = Current Assets / Current Liabilities

Current assets include things like inventories, trade receivables, and cash and cash equivalents.

Meanwhile, current liabilities include short-term borrowings and trade payables.

Those items mentioned above can be found under the balance sheet of a company’s financial statements.

How to Make Sense of a Company’s Current Ratio?

A current ratio above one suggests that the company is capable of meeting its obligations for the year.

A ratio below one suggests that the company would be unable to pay off its obligations if they come due.

Too high a ratio is not necessarily good as it shows that the company is not utilising its assets efficiently.

Calculating the Current Ratio of a Listed Company

Let’s use Singapore Exchange Limited (SGX: S68) (SGX) as an example to calculate its current ratio.

As of 30 June 2019, SGX’s current assets stood at around S$1.6 billion while its current liabilities were S$1.0 billion.

Source: SGX 2019 annual report

Therefore, SGX’s current ratio was 1.6 (S$1.6 billion divided by S$1.0 billion).

Since the current ratio is above one, it shows that SGX would be able to meet its short-term obligations.

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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the company mentioned. 

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About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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