Current Ratio

AAA

DEFINITION of 'Current Ratio'

A liquidity ratio that measures a company's ability to pay short-term obligations.

The Current Ratio formula is:


Current Ratio

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 short-term liabilities (debt and payables) with its short-term 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 acid-test ratio except that the acid-test 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

RELATED TERMS
  1. Working Capital

    This ratio indicates whether a company has enough short term ...
  2. Key Ratio

    A mathematical ratio that illustrates and summarizes the current ...
  3. Liquidity Ratios

    A class of financial metrics that is used to determine a company's ...
  4. Cash Asset Ratio

    The current value of marketable securities and cash, divided ...
  5. Acid-Test Ratio

    A stringent indicator that determines whether a firm has enough ...
  6. Current Assets

    1. A balance sheet account that represents the value of all assets ...
Related Articles
  1. Warning Signs Of A Company In Trouble
    Professionals

    Warning Signs Of A Company In Trouble

  2. Do Your Investments Have Short-Term ...
    Investing Basics

    Do Your Investments Have Short-Term ...

  3. Analyze Investments Quickly With Ratios
    Investing Basics

    Analyze Investments Quickly With Ratios

  4. Using The Current Ratio
    Investing

    Using The Current Ratio

comments powered by Disqus
Hot Definitions
  1. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  2. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  5. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  6. Budget Deficit

    A status of financial health in which expenditures exceed revenue. The term "budget deficit" is most commonly used to refer ...
Trading Center