Current Ratio

The current ratio is a financial ratio 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. A high current ratio indicates that a company has more than enough liquid assets to cover its short-term debts, while a low current ratio suggests that a company may struggle to meet its financial obligations.

The current ratio is one of the most important financial ratios because it provides a quick and easy way to assess a company's liquidity. Liquidity is the ability of a company to convert its assets into cash quickly and easily. A company with a high current ratio is considered to be more liquid than a company with a low current ratio.

The current ratio is calculated by dividing current assets by current liabilities. Current assets are assets that can be converted into cash within one year, such as cash, accounts receivable, and inventory. Current liabilities are debts that must be repaid within one year, such as accounts payable and short-term debt.

The current ratio is a useful tool for investors and creditors because it provides information about a company's ability to meet its short-term obligations. A high current ratio indicates that a company is in a good position to meet its short-term obligations, while a low current ratio suggests that a company may struggle to meet its financial obligations.

The current ratio is not without its limitations. For example, the current ratio does not take into account a company's long-term debt obligations. Additionally, the current ratio can be manipulated by a company by increasing its current assets or decreasing its current liabilities.

Despite its limitations, the current ratio is a valuable tool for assessing a company's liquidity. A high current ratio indicates that a company is in a good position to meet its short-term obligations, while a low current ratio suggests that a company may struggle to meet its financial obligations.