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Do you wish to calculate the Current Ratio of a business? Don't miss out our **Current Ratio Calculator that's free to use** and embed too! But before that, also learn in detail  about Current Ratio, its formula, how it is calculated and much more.

Ratios in finance present a snapshot of business’s position, but over and above that, the most important aspect of financial ratios is in the fact that they’re comparable on any scale. While numbers provide a base, calculation of ratios are the first step towards analytical research. Now, let’s get into it!

## What is Current Ratio?

Current ratio represents the current position of the business. That’s it! To simplify it further, let's look at it this way:

Divided by time, any business has majorly two kinds of assets and liabilities.

The first are long term and short term assets. We could go to list long term, or fixed assets like buildings, trademarks, patents, or we could just tell you that any asset that is supposed to be with the business and continue to add value for more than one year are long term assets. There are subdivisions among those as well like fixed, intangible, etc. but who cares?

Let’s talk about the short term assets, the current assets like:

1.Inventory

2.Cash and cash equivalents

3.Accounts receivables

4.Prepaid expenses

5.Marketable securities, etc.

The idea is to think in terms of liquidity. These are the assets that can be liquidated into cash in case of any scenario, which is usually payment of short term liabilities, or current liabilities like payment of portion of long term debt, taxes, accounts payable, etc.

## How to Calculate Current Ratio?

In the era of algorithms and satellites, calculation of current ratio is not a challenge. A lot of websites do the calculation for you, and even we have this FREE calculator that you can use. But the real value is in understanding what it is and what it does.

A current ratio tells you in the past one year (and it is important to remember that this calculation is based on past data, we’ll get into why later) how many times the business could have paid its liabilities in such a way that it would have exhausted its current resources.

In terms of calculation, it looks a little a little something like

## Current Ratio = (Current Assets)/(Current Liabilities)

To put it in perspective, let’s assume a company MM (no ad, cool movie) Ltd. had to pay a total of 500 USD in form of aforementioned current liabilities. It had a total of 1000 USD in current assets. So that means it could have paid that liability of 5oo USD twice to exhaust the resource of 1000 USD.

Current Ratio = 1000/500 = 2

So, this gives the current ratio to be 2.

### When Should be Current Ratio Used?

Now on its face, current ratio looks simple enough, and it is. Except for a few things that should be kept in mind.

The first thing has to do with general usability of financial ratios. Look ratios are awesome, you don’t have to look at huge 10-digit number to analyse the positions, and most of the ratios do analysis for you, and mark the red flags.

But it should be kept in mind that the entire idea of using numbers and ratios is to use past data to make future projections, which means that any ratio does not represent the position of business on the day of calculation, it represents the position as on the day of numbers.

The second is ratios eliminate numbers. For example, another company DD Ltd. has Current assets of 10000 USD and Current liabilities of 5000 USD.

While both Goodfellas and Irishman have their current ratios as 2, they operate at different scales of business; by extension turnover and net worth, which can be misleading.

### What is an Ideal Current Ratio?

The general understanding is that ideal current ratio is 2, which means having twice as many current assets as liabilities. That is not always true. We mean it can be true for industries like banking, who have regular need for cash liquidity, but that is exactly the point. Let’s understand like it like this.

As on June 26, 2020, HCL Technologies has a current ratio of 1.62, whereas JSW Steel Ltd. has a current ratio of 0.84. Now HCL clearly seems like a better company, having 0.62 times more assets than liabilities, right?

Nope. Here enter industry averages. Different industries have different cash needs. A company like JSW usually takes huge loans for their businesses, whose payments affect current liabilities, which is perhaps the reason why JSW’s current ratio is close to its industry average of around 1.

Whereas the industry average current ratio of technological companies is around 2, which means HCL is below average in terms of current ratio.

Also, a higher current ratio is not always good. In most cases, it is a signal that the company does not know how to effectively deploy its funds so it’s sitting on them, losing money in fact due to inflation and time value of money.

So in terms of idea current ratio, it should be accounted for industry averages, type of business and operations, etc. But if it’s in your test, the answer is 2.

## What is Quick ratio?

Quick ratio, or acid test ratio is a variation of current ratio but it takes all current assets except inventories. Again, the idea is to think in terms of liquidity.

While current assets like accounts receivable and marketable securities have a cash value associated to them, in terms that they can easily be converted into cash, the process of conversion of inventory to cash is a little more complicated. Here applies the goods life cycle. Raw material is converted to finished goods which are converted to sales i.e. cash and accounts receivable. Accounts Receivable is further en-cashed or sold. Which means inventories are not exactly liquid, compared to other current assets.

In terms of formula, it looks similar except

### Quick Ratio= (Current Assets-Inventories)/(Current Liabilities)

Again, the minimum acid test ratios of companies should be ideally 1, but it is also obviously subjected to aforementioned factors.

It should always be kept in mind that while math part of such analysis may look simple, the analytical part is not so. A variety of factors affect, well a variety of factors in business.

Some companies may have a high current ratio because they have too much cash. While others may have a greater current ratio due to huge amounts of accounts receivable because they fail to negotiate with their customers, and many because they don’t have a lot of debt. While ratios mark the red flags on a mine field, it is still the analyst who walks through it.

That was all about Current Ratio, its formula and significance. Did you try our Current Ratio Calculator? If you like it, don't forget to embed it on your site or blog. For any queries, do drop in the comment section.

Current Ratio

A Current Ratio Calculator is quite a handy tool for creditors to determine a company's liquidity or its ability to pay off short-term debts as such. Now, let's know What is a Current Ratio? How it is calculated? Current Ratio Formula, examples and of course a free calculator to fetch the results.

Do you wish to calculate the Quick Ratio of a business? Don't miss out our **Quick Ratio Calculator that's free to use** and embed too! But before that, also learn in detail  about Quick Ratio, its formula, how it is calculated and much more.


Ratios can make life simpler. But improper understanding of them can also often make investment complicated, the idea is to not look at ratios as absolute, but inter-twined with company’s operations. One of the ratios often used to check liquidity is called quick ratio. Let’s get into it!

## What is a Quick Ratio?

Quick ratio is one of the liquidity ratios, loosely defined quick ratio tells you about the liquidity position of a company, more importantly a company’s ability to pay short term obligations.

Here’s the thing. Among ratios, liquidity ratios are the real deal. In a very straight-forward manner, liquidity ratios basically tell you whether a company is in a position to survive the next 12 months. This is particularly useful, for both long term and short term investors, because of a very famous phrase in finance, ‘Return of capital is more important than return on capital.’

A quick ratio basically measures a company’s ability to pay its short term liability obligations that are liability obligations due in the next 1 year without having an impact on the market price of its asset. The last part is very important; because the idea is that the company should be able to meet its short term expectations without having an impact on its market reputation.

## What's the Quick Ratio  Formula?

Here’s the Quick ratio formula, that you can grasp quickly:

## Quick Ratio = (Current Assets* – Current Inventory)/ Current Liabilities

or

### Quick Ratio = Current Assets* – Inventories – Prepaid Expenses / Current Liabilities

If you understand Balance Sheets, you know that there is an alternative formula to do this, sort of like holding the ear with the other hand.

### Quick Ratio = Capital Employed + Marketable Securities  + Accounts receivable / Current Liabilities

Current assets* include cash on hand, accounts receivable, any shares, bonds, etc held as an investment.

But you could have read that in a textbook, lets understand the rationale of it.

## Quick Ratio: What's the Logic behind it?

First of all, quick ratio is very similar to current ratio, which is basically all the current assets divided by current liabilities. But a quick ratio displays the liquidity better, for reasons we’ll get into. It is also why it is called the **‘Acid-test’ ratio**.

A Quick ratio doesn’t include inventories as a current asset, which includes both finished goods and semi-finished goods. Here’s the logic. You see current assets are those assets that could be converted into cash within 90 days. If a company were to do that with its inventories, the supply shock would in essence kill the demand, lowering both price and market reputation of the company.

The second thing Quick Ratio doesn’t include is prepaid expenses. To understand that, you need to know the very subtle difference between things that have cash value and things converted to cash. You see prepaid expenses do have cash value, for example prepaid expense for advertisement that would be going on for five years. All of the expense would be done in the first year, but it would have a cash value providing benefit over five years, hence it is an asset accruing benefit over five years. But you can’t exactly sell that, get it?

Also, current liabilities are liabilities that to have to be paid within next one year, including but not limited to accounts payable, short term debt, accrued wages and so on.

## How is Quick Ratio Calculated? Example

Let’s understand this with an example. Consider the following information.

A company Lethal Weapon ltd. has following balances:

Cash and Cash Equivalents = Rs. 1,00,000

Shares of Scarface Ltd. (Temporary Investment) = Rs. 1,00,000

Trade Receivables = Rs. 50,000

Wages Payable = Rs. 70,000

Trade Payables = Rs. 1,20,000

Income Taxes Payable = Rs. 60,000

Quick Ratio = 100000 + 100000 + 50000 / 70000 + 120000 + 60000

= 350000 / 350000

= 1

Interpreting this, the company Lethal Weapon ltd. as many current assets as it has liability obligations coming up, which means worst case scenario, the company might be able to meet its short term debt obligations with ease.

This is also one of the reasons why **ideal quick ratio is considered 1**.

And yes, no matter in whatever currency you wish to get the results, the Quick ratio formula remains same.

### How do Customers & Type of business Impact a Company’s Quick Ratio?

Here, we jump on to a little more analytical part. The thing is, while assets and liabilities are numbers on a sheet, they, in essence represent actions of people.

Now, what this means?

Suppose, you take accounts receivable as a company’s current asset in calculation of quick ratio, and you get a particular answer. You are right both mathematically and formulaic-ally, but you can still be wrong in your judgement of using this. Here’s how?

Maybe the company failed to recover those amounts from its customers, which could be for a ton of different reasons. Now this may have a cascading effect on company’s short term liquidity, and maybe it may so happen that because customers didn’t pay, the company doesn’t necessarily have money to pay its suppliers, which halts or decreases production, creating a chain of events that numbers couldn’t have possibly displayed. Well, not just quick ratio, at least.

### Financial Ratios: Significance

What’s the lesson here? Don’t think of ratios in individual absolute, but keep in mind the inter connectivity of actions.

See if a company’s Current Ratio is 2 but the Quick Ratio is 1, it means the company has inventories as much as its current liabilities, increasing inventory costs, which may depend industry-wise whether it is good or not. In the aforementioned example, one may look at account receivable cycles and duration of the company to get better idea of the company’s holding.

Quick Ratio

A Quick Ratio Calculator is useful financial tool to determine a company's liquidity position. What is a Quick Ratio? How it is calculated? Get Quick Ratio Formula, examples and try a free calculator to fetch the results.

Do you wish to calculate the P/E or Price Earnings Ratio of a company? Don't miss out our **P/E Ratio Calculator that's free to use** and embed too! But before that, also learn in detail  about P/E Ratio, its formula, how it is calculated and much more.

Ratios, in the world of finance do much more than just showing the quantum of two variable’s co-relation. They enable investors and people at large to form opinions about movements of the market and by extension, the economy in general.

Let’s learn more about P/E ratio this time in simple non-pretentious terms.

## What is P/E ratio?

Price-to-Earnings (P/E) ratio is one of the aspects of fundamental analysis of stock markets. P/E ratio takes into account two things. The first is the earnings, which are basically **earnings per share for shareholders**. Note that this earnings does not mean dividend or bonus shares, which are tangible forms of income that a shareholder earns. 

When we say earnings per share, these are the earnings available to shareholders (usually for the past 12 months) after deduction of all the expenses, interest payments and taxes. Out of this earnings, the company gives out dividend, retains profit, and does capital investment and much more, needless to say the physical tangible income and earnings per share are different. This is nothing but basic economic value added by the company. Earnings are usually taken 

The second aspect is the **market price per share**. See, market price of any share is usually said to reflect information available to the people about the business whose shares are in consideration. This information can be a variety of factors such as the type of business the company is in, its assets, its management efficiency, its ability to make profit, and so on. Movements in all of these things have a positive or negative impact on the price of a share, which is in turn regulated by market supply and demand for the share.

P/E ratio establishes relationship between these two variables, which can be analyzed both, just by itself as well as over a period of time. Here’s the formula

### P/E or Price to Earnings Ratio = Market Price per Share / Earnings Per Share

Now, let's understand this by a simple example:

## P/E Ratio Example:

Consider this hypothetical company, Mzilikazi ltd. whose profit after tax is Rs. 10,00,000. It has 1,00,000 shareholders. The market price of the share is trading around Rs. 100.

Here, first we have to find out how much each shareholder is gaining in profit i.e. earnings per share. Since the profit is Rs. 10 lakh and there are 1 lakh shareholders, it is easy to say that each shareholder is earning Rs. 10 ( 1000000 / 100000).

### Calculation of P/E ratio = Market Price per Share / Earnings Per Share

= Rs 100 per share / Rs 10 EPS

= 10:1

Analysing this, what this basically means is that for every 10 rupees invested in the company, the company adds an economic value of Rs. 1 on that, or the earning per share would be 10% (1/10 = 0.1 * 100) of the value invested.

### P/E Ratio: Analysis

As a general rule of thumb, **the lower the P/E ratio, the better**. This is because P/E ratio is nothing but the amount to be invested in a company to get 1 rupee a return, meaning a firm with P/E ratio 4 has a greater return on investment or economic value added, than a firm with P/E ratio 10, because in one case you only have to invest 4 rupees to get 1 rupee return. But this is sort of an absolute way of looking at it.

The correct answer, like all ratios, would be that there is no good P/E ratio. But for the sake of analyzing and comparing, one should always limit the variables to be as little as possible. In this case, one company’s P/E might give some idea as to how the company is performing, however, comparing the P/E with other companies in the same industry at the same scale, like McDonalds and Burger King, or say the industry average, might give a much better idea of how the company is performing both individually and among its peers.

The third form would be to look at the ratio from a time series perspective, i.e. comparing a company’s P/E ratio with its past P/E ratios and using estimated earnings of the next quarter to form a sort of estimate for future P/E ratios. Obviously, if its reducing over a period of time, it is said that the company is performing good and vice-versa.

### P/E Ratio: Limitations

The first limitation would be if you looked at P/E ratio as an absolute metric for evaluation. One key thought process, or rule behind fundamental analysis is the fact that there are no absolute metrics, only relevant metrics. This means that a company might have a good P/E ratio, and you might buy the stock considering only that, but not taking into account a factor like, say past data of illegal practices of management. It may happen that a news of scandal might drive the price and P/E ratio down after that.

The second is kind of more technical one. See, like all people are different, all companies are different too. Even in similar industries, companies may have different timelines of cash flows, which means a current high P/E ratio doesn’t mean it is always going to be high and vice versa.

## Price-to Earnings Ratio: The Bottom Line

As mentioned above, P/E ratio is not an absolute measurement of value. As all good investors know, there is no such thing, just information, its relevance and co-relation to price. Having said that, P/E ratio does provide a good insight on a company’s performance, both by itself and among its peers.

P/E Ratio or Price-to-Earnings

Price-to Earnings ratio or P/E ratio, which along with showing a co-relation, also shows a business in an open market place rather than it existing in isolation, essentially forming a pattern of the market constituents reacting to a business’s actions and showing the quantum of that relationship.

Now, let's look into detail the meaning, formula, examples and interpretation of Gross Profit Ratio.

In many ways, profits measure the worth of a company in a trivial sense. The main purpose of any business is adding value, but value can be intangible, and to paraphrase John Von Neumann, the subject matter of economic theory lies in quantification of mechanism of prices, production, earning and spending. So, in many ways, profits, or the measurement thereof provides a sort of barometer for performance. But first, let’s get into why using financial ratios is a good idea at all.

## Financial Ratios: Need & Importance

The problem with numbers, however, is the fact that by themselves, they don’t mean anything. For example, consider this. District A has 500 people, and about 450 personal vehicles. One inference that you can draw from this is that A has a relatively good standard of living, and is probably in a country with prosperity. But that still doesn’t give you how many people actually use the vehicles, what kind of resources they utilize, and so on.

For instance, out of 450 vehicles, 300 are bi-cycles, about a 100 motor bikes and 50 cars, and out of those 150 motorized vehicles, only 10 are used on a regular bases. Did that change your image of A from a well to do neighborhood to a district in a country which probably has oil shortage?

The same way, profits by themselves mean nothing except telling you this is the amount of surplus that was earned. But when you compare it with previous year’s profit/loss, you get the idea of how much the business has grown, when you compare it with sales figures, you get how much margin does the business earn, and how well are its expenses handled. That is exactly what ratios do, they serve as sort of comparison giving a figure that is not absolute, but relative to something else.

One such ratio, and probably the most simplest of all, is Gross Profit Ratio. And, that's what we'll be discussing in detail here.

## What is Gross Profit Ratio? Meaning

Gross Profit takes into account two things. Gross Profit of a business, and sales. Gross Profit ratio is basically gross profit represented as a percentage of sales. The formula looks a bit like this.

## Gross Profit Ratio Formula

A simple and easy to grasp GP ratio formula:

### Gross Profit Ratio = ( Gross Profit / Net Sales ) * 100

Here, Gross Profit = Net Sales - Cost of Goods Sold

where Net Sales = Sales - Return Inwards and
Cost of Goods Sold = Opening Stock + Purchases - Closing Stock + Direct Expenses Incurred

Those murky waters comfortable for you, lad? Let’s dive a little deeper.

To understand the importance, or even the why of GPR, we look at what the ratio represents, starting with gross profit first.

Basically, when you break down any business activity anywhere in the universe, a business is basically two things, there are costs, and there is revenue. Revenue is simple, it is money coming in. Costs, however, can be further divided into two types.

When you run a business, you incur expenses to make a product/service in the first place, which is obviously essential to the business. These are known as manufacturing costs, or cost of goods sold, which is just basically another way of saying “The goods that were sold, reflected in sales, this is what it cost to make those goods.”

Then there are costs you incur to get the product to your customers, expenses like cost of telling people you make cool stuff (advertising costs), cost of hiring people to design more cool stuff, maintain books or cost of rent of the place where you make cool stuff (administration costs), costs of actually selling your cool stuff i.e. getting it to different places (selling and distribution costs), etc.

For the calculation of GP ratio, however, we focus on the first set of costs, that is the costs that were incurred to bring the raw material in and convert them into finished goods. We compare these costs with Sales in an indirect manner. Consider this example.

## Gross Profit Ratio Example Explained:

A company, Sub-Zero ltd. has inventory of raw material (previous year’s closing stock/ this year’s opening stock) worth of Rs 2,00,000 and it purchased raw material worth Rs 5,00,000. At the end of the year, it had a closing inventory of Rs. 40,000. For the same year, the company sold goods worth Rs. 10,00,000.

During the year, the company returned raw material worth Rs. 50,000 to its supplier, Scorpion ltd, because the goods were defective. Also, goods sold, worth Rs. 70,000 were returned back to the company because they were defective as well.

### Calculation of Gross Profit Ratio

For calculation of GP ratio here, we first calculate the Gross profit.

Gross Profit = Net Sales - COGS

Gross Profit = (Sales – Sales Return) – (Opening Stock + Purchases – Closing Stock – Purchase Returns)

Gross Profit = (10,00,000 – 70,000) – (2,00,000 + 5,00,000 – 40,000 – 50,000)

Gross Profit = Rs 3,20,000

Now, we compare this profit to Net Sales.

Gross Profit Ratio = ( Gross Profit / Net Sales ) * 100

Gross Profit Ratio = ( 3,20,000 / 9,30,000 ) * 100

Gross Profit Ratio = 34.41 %

## How is Gross Profit Ratio Used?

Analyzing the aforementioned example, the ratio there basically means that for every Rs. 100 of sales, 100 because it is in percentage form, we get a profit of Rs. 34.41. Or you could look at it the other way, which probably is more useful. For every Rs. 100 of sales, Sub-Zero ltd incurs a cost of Rs. 65.59 (100 – 34.41).

Both of these perspectives have applications. The most basic use is as an analytical term for sales on a purely quantitative co-correlation basis, for example if Sub-Zero were to infuse more capital in production (taking demand as a constant, obviously), then for every Rs. 65.59 of incurred costs, you would obtain sales of Rs. 100 (or for every Rs. 100 increase in sales, the profit increases by Rs.34.41).

But here’s the thing, you can’t exactly take demand as constant in real life, because there are a ton of other factors involved. That was the textbook-mentioned use, anyway, let’s get into how you can actually use GP ratio, in real life.

## How can Gross Profit Ratio be used in Real Life?

As mentioned earlier, even ratios don’t mean anything by themselves. But, from an analytical perspective, there can also be comparison made for a company over a period of time to see how the company’s profit margin has reacted over the years with increase and decrease of sales, which can be a very insightful tool for a company’s production efficiency, and to some extent lower management's efficiency too, a display of how they have managed to control costs.

Another way GP ratio can be used is by comparing it to Net Profit ratio, which instead of just manufacturing cost like GP ratio, accounts for all the costs and compares that with sales, so there’s a common unit of measurement.

**Note:** While GP ratio will always be bigger than Net Profit ratio, how much gap is there between the two ratios can tell you a lot about company’s managerial efficiency and cost distribution.

For example, in the above scenario, if the Net Profit ratio is, say 4.41%, that means while the company is earning about Rs. 34.41 for every Rs. 100 of sales, it is bearing Rs. 30 in just advertising and administration costs, bringing the profit margin so down that unless it is a business on a huge scale, growth is unfeasible unless the costs are cut down. Again, there could be various scenarios.

If you want to make things fun, however, think of a scenario where Net Profit ratio can be greater than Gross Profit ratio, and comment below! (Hint: The answer doesn’t lie in costs, it lies in revenue.)

### Gross Profit Ratio: Limitations

Like any analytical tool, used by itself, GP ratio does have some limitations.

First, while it gives an idea of the company’s costs compared to sales, it only looks at manufacturing costs, which is basically saying it doesn’t factor in other costs. This could very well mean the difference between profit and loss.

Secondly, it can get a little trick just analysing manufacturing costs. For example, say the company under consideration is an application like Paytm or Netflix, which might not even have manufacturing costs. GP ratio is useless there. (Of course, for Netflix, you may take the costs of licensing deals with studios for movies as manufacturing costs, or perhaps costs of server space, but you get the idea right?)

## Gross Profit Ratio: Final Interpretation 

Gross Profit ratio is probably one of the simplest ratios out there, and yet at the same time when used properly can be very effective. But don’t let your ratio education stop here, we have a ton of other useful [important financial ratios](https://fintrakk.com/financial-ratios-stock-investing-important-basic/) and intuitive stuff, check them out!

That was all about Gross Profit ratio and its interpretation. If you have any additional information to add here, do let us know. And, yes don't forget to try our **FREE Gross Profit Calculator** above and share your feedback.

Gross Profit Ratio

A **Gross Profit Ratio Calculator** is quite a handy tool to check the profitability as well as the financial performance of a company. But, firstly its important to know **What is a Gross Profit Ratio? How it is calculated? Gross Profit Ratio Formula, examples** and of course **a FREE Gross Profit Ratio calculator** to fetch the results. Let's begin the interpretation of Gross Profit in an easy manner.\n

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