What is Current Ratio?

The Current Ratio is a financial ratio used to evaluate a company’s ability to meet its short-term financial obligations. It measures the company’s liquidity by comparing its current assets to its current liabilities. The formula for calculating the Current Ratio is:

Current Ratio = Current Assets / Current Liabilities

Current assets include cash, marketable securities, accounts receivable, inventory, and other assets that are expected to be converted into cash within the next year. Current liabilities include accounts payable, short-term debt, accrued expenses, and other obligations due within the next year.

The Current Ratio provides an indication of a company’s short-term solvency and its ability to cover its immediate financial obligations. A ratio above 1 suggests that a company has more current assets than current liabilities, indicating a relatively strong liquidity position. On the other hand, a ratio below 1 implies that the company may have difficulty meeting its short-term obligations.