Current ratio

Definition

The current ratio is a financial metric that measures a company's ability to pay short-term obligations with its current assets. It is calculated by dividing current assets by current liabilities.

5 Must Know Facts For Your Next Test

1. A current ratio greater than 1 indicates that a company has more current assets than current liabilities.
2. A very high current ratio may suggest inefficient use of assets or excessive liquidity.
3. The formula for the current ratio is Current Assets / Current Liabilities.
4. The current ratio is used to assess a company's short-term financial health and liquidity.
5. It can be found on the balance sheet, typically under the sections for current assets and current liabilities.

Review Questions

• What is the formula for calculating the current ratio?
• How does a current ratio of less than 1 affect a company's perceived liquidity?
• Why might a very high current ratio be seen as unfavorable?

Related terms

Quick Ratio:

A stricter measure of liquidity that excludes inventory from current assets.

Working Capital:

The difference between a company's current assets and its current liabilities.

Liquidity:

The ability of a company to meet its short-term obligations using its most liquid assets.