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.