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Current ratio definition
Current ratio is a liquidity measure that divides a company's current assets by its current liabilities. It shows whether the company holds enough short-term assets to cover the obligations due within one year.
Current assets include cash, accounts receivable, inventory, and anything else expected to turn into cash within a year. Current liabilities include accounts payable, short-term debt, taxes payable, and accrued expenses. A ratio above 1.0 points to stronger short-term liquidity, while a ratio below 1.0 can signal that a company may struggle to meet near-term bills.
Current ratio has two close relatives. The quick ratio is stricter, because it strips out inventory and counts only the assets that convert to cash fastest. The debt ratio looks further out, measuring total debt against total assets rather than short-term liquidity. The current ratio sits between them as the standard test of whether a year's bills are covered.
Current ratio Example
A company reports two balance-sheet figures:
- Current assets: USD 60 million - Current liabilities: USD 30 million
The current ratio is:
USD 60 million √∑ USD 30 million = 2.0
A current ratio of 2.0 means the company holds USD 2.00 of current assets for every USD 1.00 of current liabilities.
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