DEFINITION of 'Current Ratio'
A liquidity ratio that measures a company's ability to pay shortterm obligations.
The Current Ratio formula is:
Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".
INVESTOPEDIA EXPLAINS 'Current Ratio'
The ratio is mainly used to give an idea of the company's ability to pay back its shortterm liabilities (debt and payables) with its shortterm assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt  as there are many ways to access financing  but it is definitely not a good sign.
The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. Because business operations differ in each industry, it is always more useful to compare companies within the same industry.
This ratio is similar to the acidtest ratio except that the acidtest ratio does not include inventory and prepaids as assets that can be liquidated. The components of current ratio (current assets and current liabilities) can be used to derive working capital (difference between current assets and current liabilities). Working capital is frequently used to derive the working capital ratio, which is working capital as a ratio of sales.
Want to learn more about how to use Current Ratio? Take a look at  Liquidity Measurement Ratios: Current Ratio and How To Analyze A Company's Financial Position.
VIDEO

Working Capital
This ratio indicates whether a company has enough short term ... 
Quick Ratio
An indicator of a company’s shortterm liquidity. The quick ratio ... 
Exchange Ratio
The relative number of new shares that will be given to existing ... 
Exploration & Production  E&P
An E&P company is known to be in a specific sector within ... 
Gross Expense Ratio  GER
The total percentage of a mutual fund's assets that are devoted ... 
Permanent Current Asset
The minimum amount of current assets a company needs to continue ...

What are the differences between solvency ratios and liquidity ratios?
Liquidity ratios and solvency ratios are tools investors use to make investment decisions. Liquidity ratios measure a company's ... Read Full Answer >> 
How are liquidity ratios different than solvency ratios?
Liquidity ratios measure a company's ability to meet shortterm debt obligations, while solvency ratios measure a company's ... Read Full Answer >> 
When are current assets converted to liquid assets?
Current assets may be converted to liquid assets at any time, but by definition, they are expected to be either used up or ... Read Full Answer >> 
What is the formula for calculating the current ratio in Excel?
The current ratio is a metric used by the finance industry to assess a company's shortterm liquidity. It reflects a company's ... Read Full Answer >> 
What is the proper ratio between working capital, current assets and current liabilities?
There are a number of factors that influence the determination of a good working capital ratio, a primary liquidity ratio ... Read Full Answer >> 
When computing the PEG ratio for a stock, how is a company's earnings growth rate ...
Remember that the price/earnings to growth ratio (PEG ratio) is simply a given stock's price/earnings ratio (P/E ratio) divided ... Read Full Answer >> 
What is the formula for calculating the current ratio?
The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >> 
What is the formula for calculating the debttoequity ratio?
Expressed as a percentage, the debttoequity ratio shows the proportion of equity and debt a firm is using to finance its ... Read Full Answer >> 
How do I lower my debttoincome (DTI) ratio?
A debttoincome ratio is a personal finance measure that compares the amount of debt you have to your overall income. Lenders ... Read Full Answer >> 
How does my debttoincome (DTI) ratio affect my ability to get a mortgage?
A debttoincome ratio is a personal finance measure that compares the amount of debt you have to your overall income. Lenders, ... Read Full Answer >> 
What's considered to be a good debttoincome (DTI) ratio?
A debttoincome ratio (DTI) is a personal finance measure that compares the amount of debt you have to your overall income. ... Read Full Answer >> 
How can the pricetoearnings (P/E) ratio mislead investors?
The pricetoearnings (P/E) ratio is calculated by dividing a company’s stock price per share by its earnings per share (EPS), ... Read Full Answer >> 
How can the current ratio be misinterpreted by investors?
The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >> 
What are the main differences between the current ratio and the quick ratio?
The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >> 
What does it mean when "N/A" appears for a company's P/E ratio?
A "N/A" reported in a stock's pricetoearnings ratio (P/E), can mean one of two things. The first, and simplest, would be ... Read Full Answer >> 
Stocks with high P/E ratios can be overpriced. Is a stock with a lower P/E always ...
The short answer? No. The long answer? It depends. The pricetoearnings ratio (P/E ratio) is calculated as a stock's current ... Read Full Answer >>

Investing Basics
Analyze Investments Quickly With Ratios
Make informed decisions about your investments with these easy equations. 
Insurance
Working Capital Works
A company's efficiency, financial strength and cashflow health show in its management of working capital. 
Fundamental Analysis
The Value of Profitability Ratios
How is a company being run? Is it generating profits? The answer to these questions lies in analyzing the profitability ratios of a company. 
Bonds & Fixed Income
Understanding The Sharpe Ratio
This simple ratio will tell you how much that extra return is really worth. 
Fundamental Analysis
Analyzing Investments With Solvency Ratios
Solvency ratios are extremely useful in helping analyze a firm’s ability to meet its longterm obligations; but like most financial ratios, they must be used in the context of an overall company ... 
Professionals
Warning Signs Of A Company In Trouble
Don't let your clients go down with ship! Learn how to escape sinking with these tips. 
Fundamental Analysis
Getting On The Right Side Of The P/E Ratio Trend
Buying at the right time is crucial, but how do we know when that is? 
Investing Basics
Vertical Integration
Vertical integration occurs when a company buys and controls other businesses along its supply chain. 
Investing
Asset Turnover Ratio
Investopedia explains: The asset turnover ratio is a measure of a company's ability to use its assets to generate sales or revenue, and is a calculation of the amount of sales or revenue generated ... 
Fundamental Analysis
The DebtService Coverage Ratio (DSCR)
The DebtService Coverage Ratio (DSCR) is a simple way to analyze whether a company can adequately manage its borrowing costs. The ratio helps banks evaluate the credit worthiness of an organization ...