Current ratio

Current Ratio

A liquidity metric that measures a company’s ability to pay short-term obligations, calculated by dividing total current assets by total current liabilities.

For instance, a manufacturing company with $1.5 million in current assets (cash, accounts receivable, inventory, prepaid expenses) and $900,000 in current liabilities (accounts payable, short-term debt, accrued expenses) would have a current ratio of 1.67, suggesting adequate short-term liquidity.

The current ratio provides a basic assessment of whether a company can cover its short-term obligations with its short-term resources. A ratio above 1.0 indicates more current assets than current liabilities, generally considered positive for liquidity. However, excessively high ratios might suggest inefficient use of assets. Optimal levels vary by industry, with capital-intensive businesses typically maintaining lower ratios than service companies. While useful as a quick measure, the current ratio has limitations since it doesn’t consider the liquidity of specific assets or the timing of obligations within the one-year horizon.