What is current ratio?
Current ratio compares a company’s current assets to its current liabilities, essentially measuring a company’s ability to fulfil short-term financial obligations. It’s a good indicator of financial health and can warn of impending issues if the ratio is too low or even too high.
A company’s current ratio should be roughly in line with industry averages, as a ratio that’s too high could indicate that assets are being used inefficiently, while a low ratio could mean financial or management problems.
Key takeaways from this section:
- Current ratio compares a business’s current assets with its current liabilities and shows its ability to pay short-term debts.
- When using current ratio to assess a company’s financial health, it should be taken in context with past performance and other similar companies in the same industry.
- Current ratio only provides a surface-level look at the financial health of a company, and further analysis is needed to understand the nature of current assets and how easily liquidated they are.
Understanding the Current Ratio
The core purpose of a current ratio is to measure a company’s ability to fulfil short-term liabilities such as debts and supplier invoices using its current assets, meaning cashflow or stock inventory. A ratio of less than 1.0 can mean a company will struggle to meet its financial obligations for the current period, while a ratio higher than 1.0 shows a company has the financial stability and is able to pay current debts and invoices.
The use of current ratio should be deployed in conjunction with other measures for a more complete financial picture, as current ratio only provides a limited view. A company’s ratio may be low because of investment projects or because customers are being slow to fulfil invoices. Likewise, the ratio could appear high and healthy, but the business’s ability to shift stock might be hampered by other factors, meaning there may be problems on the horizon.
The current ratio can be best utilised as a comparison with competitors and historical norms for a company, so a business can see if the ratio is normal for their industry or for a certain time of year.
Current Ratio in practice
It can be hard to say what a good or bad current ratio really looks like, as it only shows a small snapshot of a business’s financial activity. Looking at multiple current ratios over a longer period can be much more insightful, and highlight positive or negative trends for a company. While two different business could both show a current ratio of 1.0 during a financial year, one could have reached that ratio after a downward trend over several years, while the other could be increasing their ratio year on year.
An important thing to remember is that current ratio is only useful when comparing against other very similar companies in the same industry, as comparing to a business with a very different operational model might be misleading or ultimately fruitless.
It’s also worth remembering that while the current ratios of two businesses might appear very similar, they can represent very different types of assets, some of which may be more easily liquidated than others. For example, one company could have a large amount of cash in the bank, while the other holds a large amount of stock. Naturally the latter is harder to turn into a liquid asset.
Calculating the Current Ratio
The formula for current ratio is the total value of current assets divided by the total value of current liabilities. This gives you the ratio number, which should be somewhere in the region of 1.0.
Have you thought about Invoice Finance as a cash flow solution for your business?
Invoice finance allows you to release cash quickly from your unpaid invoices.
As your lender, we can release up to 90% of your invoices within 24 hours. On payment of the invoice from your customers, we will then release the final amount minus any fees and charges. There are different types of invoice financing options available to businesses depending on the situation and the level of control they require in collecting unpaid invoices.
We are an invoice financing company who offer a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our Confidential Invoice Discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.
The benefits of invoice finance companies such as Novuna Business cash flow
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Competent staff, slick technology. Would recommend
Halo is one of the smartest bits of tech I have seen & every team is only as good a it's people and I would like to take this time to actually specifically point out Alex Hall & Claire Davies. Alex is an account manager that has continually improved during our time working together and is a real credit to Novuna. Claire has been exceptional from start to finish; meticulous in her work and very patient with us at every temp - an absolute star. It is a shame that the email address went to a generic platform and not each individual. I totally understand why this works better for companies but it did mean that the personal element was lost meaning that starts like Claire will be harder to identify from a customer point of view.
High recommedation for Novuna Business Cashflow.
My company was in need of invoice factoring to assist with the cashflow due to the nature of debtor days with our clients. After looking at a number of options, the right decision was made to work in partnership with Novuna Business Cashflow. Right from setup through sales to customer service, the communication and support has been outstanding. Providing me with all the information I needed regarding new clients coming onto our books. The system they use is so user friendly and the drawdown payments are very efficient in the fast moving world of temporary payroll. This has allowed my company to look at positive growth knowing we are safe financial hands. I would highly recommend Novuna Business Cashflow 10/10.
Set up went well and communication was good.
Syed and Vipul were extremely helpful top class service
Very helpful from the start
Great people made this process very straightforward.
Jemma from Novuna (formally Hitachi) was brilliant. Worked with us throughout the process and succeeded when some others had failed. Carried out the necessary checks with a smile and cheery demeanour, making what would have been a laborious process quite manageable.
Teething problems -Maybe ?
It's still early days so I may alter this review at a later date. However with retentions and concentration limits and other items, were finding were not getting 85% up front, were probably getting nearer 70% Also when a customer pays the remaining allegedly 15% due to us seems not to be credited to become available. For instance a customer paid Â£6918 and a customer paid Â£1300 hence we should see an extra Â£1330 available (15% of both these payments). However availability seemed to go down and not up by Â£1330 !!! Hard to work out where this 15% has actually gone ? I'll re-submit this review when things become clearer.
I found Hitachi true to their world in every aspect of the service they promised. I can't recommend enough.
Excellent Customer care and service.
Excellent customer service from start of initial conversations, right through to finally becoming a customer. The whole team involved are a credit to Hitachi, they were accommodating and informative the whole way along the process. I would highly recommend Hitachi to future clients and business associates. Thanks Alan.
I really enjoyed working with the Hitachi team, professional, helpful and really good people to deal with. They have made what could have been a very difficult experience a pleasure. Very happy to recommend them.
Hitachi made the process of moving factoring facilities painless, bearing in mind we previously had our facility with the same provider since 1997. I cant fault Hitachi's staff and processes and we are delighted with the move.
Staff excellent all together professional
Great service so far
From start to finish the process for transferring our invoice finance to Hitachi has been been brilliant, a smooth transition, great communication our link Person Jonathan Oakes has helped the process go through seamlessly, A great experience so far and a brilliant start to what we hope will be a long term partnership.