Current Ratio Explained With Formula and Examples 2025

For example, a debt-to-capital ratio of 0.5 means that one-half of the company’s capital is funded through debt and one-half through shareholders’ equity. The times interest earned (TIE) formula is a straightforward calculation that assesses a company’s ability to cover its interest expenses with its earnings. The TIE ratio reflects how often a company’s operating income can cover its annual interest expense and is a critical indicator of financial health.

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• A high TIE means that a company likely has a lower probability of defaulting on its loans, making it a safer investment opportunity for debt providers.
• This could indicate that the company has better collections, faster inventory turnover, or simply a better ability to pay down its debt.
• A higher debt-to-EBITDA ratio indicates decreased financial stability, all else equal.
• This generally indicates a healthy liquidity position, implying a strong ability to meet short-term financial obligations.
• To better understand the business’s financial health, the ratio should be computed for several companies that operate in the same industry.
• Calculating the current ratio at one point in time could indicate that the company can’t cover all of its current debts, but it doesn’t necessarily mean that it won’t be able to when the payments are due.

Now that you know how the ratio works, grab those financial statements and see where you stand. Just make sure you’re making enough money to pay off your loans and continue what does a current ratio of 2.5 times represent. investing in business growth. Interest and taxes are are listed as expenses on your profit and loss statement.

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It’s an important measure of liquidity because using short-term assets is better than having to sell long-term and possibly revenue-generating assets. For example, a current ratio of 2 means the company has $2 in current assets for every $1 in current liabilities, which generally signals a comfortable cushion to meet short-term financial obligations. It represents the ‘margin of safety’ or ‘cushion’ available to the creditors and other current liabilities.

• At this level, the marketer prepares an expected product by incorporating a set of attributes and conditions, which buyers normally expect they purchase this product.
• It compares the dollar amount of sales to its total assets as an annualized percentage.
• From here we have total current assets of $177,077 and total current liabilities of $70,056, dividing $177,077 / $70,056 we get a current ratio of ~2.53.
• Investors often use the Current Ratio to gauge a company’s financial stability and its ability to weather economic downturns.
• The information provided on this website is for general informational purposes only and does not constitute investment advice, financial advice, trading advice, or any other form of advice.
• Low values for the current ratio (values less than 1) indicate that a firm may have difficulty meeting current obligations.

Making more informed decisions with TIE

The times interest earned ratio (TIE), also known as the interest coverage ratio (ICR), is an important metric. A company’s ability to pay all interest expense on its debt obligations is likely when it has a high times interest earned ratio. To assess a company’s ability to pay principal plus interest on debt, you can also use the debt service coverage ratio. The debt service coverage ratio (DSCR) is net operating income income statement divided by debt service, which includes principal and interest. Debt service coverage ratio may be a better measure of credit risk for lenders.

It also offers more insight when calculated regularly over several periods. That is, changes in the current ratio over time can often offer a clearer picture of a company’s finances. This is why it is helpful to compare a company’s QuickBooks ProAdvisor current ratio to those of similarly-sized businesses within the same industry.

• Current assets typically include cash, accounts receivable, and other short-term assets that can be easily converted into cash.
• Especially if it is compared agains the historical values for the company as well as compared with its industry peers.
• The current ratio is a key liquidity ratio that helps assess a company’s ability to pay its short-term debts.
• Monitoring a company’s Current Ratio over time helps in assessing its financial trajectory.
• In an article, LeaseQuery, a software company that automates ASC 842 GAAP lease accounting, explains lease interest expense calculation, classification, and reporting.

Examples of Industry Benchmarks (Illustrative, Not Absolute)

A consistently strong current ratio is a positive signal of financial stability and prudent cash management. It shows that a company efficiently manages its working capital and is less likely to face liquidity crises. Businesses with a healthy ratio are better positioned to handle economic downturns, unexpected expenses, or market fluctuations.