Definition
The current ratio assesses short-term liquidity by comparing current assets (cash, receivables, inventory) to current liabilities. A ratio above 1.0 means the company can cover its near-term obligations. However, too high a ratio may indicate inefficient use of assets or excess inventory.
functions Formula
Current Ratio = Current Assets / Current Liabilities
lightbulb Example
A company has $15M in current assets and $10M in current liabilities. Current ratio = 1.5x, meaning $1.50 in liquid assets for every $1.00 of short-term debt.
verified_user Key Points
- Above 1.0 required for basic liquidity
- 1.5-3.0 typically considered healthy
- Too high may indicate idle cash or excess inventory
- Quick ratio is a stricter version excluding inventory