FP&A - How to Calculate Current Ratio

The current ratio, also known as the working capital ratio, measures a business's potential for meeting its short-term obligations that are due within a year. In this video, we cover the most common accounts included in current assets, such as cash, accounts receivable, inventory, and prepaid expenses. Learn: - Why cash is valued at full value in the ratio. - The role of prepaid expenses in current assets. - How inventory valuation differs across industries. - How accounts receivable might generate less cash than expected and the concept of factoring. Finally, we discuss why a current ratio of 2:1 is often seen as a healthy benchmark while recognizing that this can vary by industry and company stage. Understand the components of the current ratio to make better financial analyses. Learn more about this topic here: https://corporatefinanceinstitute.com/resources/knowledge/finance/current-ratio-formula/ If you found this breakdown of the current ratio helpful, you'll definitely want to watch our video on https://youtu.be/rkJqoqyxQLw next. It takes liquidity analysis a step further by focusing only on the most liquid assets—perfect for understanding a company's short-term financial health even more precisely! #CurrentRatio