| the ratio between current assets and current liabilities. |
| current ratio n. The arithmetic ratio of current assets to liabilities. |
Current Ratio
A liquidity ratio that measures a company's ability to pay short-term obligations calculated by dividing current assets by current liabilities. This also helps to give an idea as to the efficiency of the company's operating cycle.
Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".
Investopedia Commentary
The ratio is mainly used to give an idea about the company's ability to pay back their short-term liabilities (debt and payables) with their short-term assets (cash, inventory, receivables). The higher the current ratio the more capable the company is at paying their obligations. A ratio under 1 suggests that the company is unable at that point to pay off their obligations if they came due. While this shows the company is not in good financial health, it does not necessarily mean it will go bankrupt as there are many ways to access financing but it is not a sign of financial health.
The current ratio can give an idea to the efficiency of a company's operating cycle or their ability to turn their product into cash. Companies that have trouble with getting paid on their receivables or have long inventory turnover can run into liquidity problems as they are unable to alleviate their obligations. Because business operations differ in each industry, it is more useful to compare companies within the same industry.
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See also: Acid-Test, Current Assets, Current Liabilities, Inventory Turnover, Obligation, Receivables, Working Capital
current ratio