Summary
The Current Ratio measures a company’s ability to meet short-term obligations using short-term assets. It compares current assets with current liabilities.
This is one of the most widely used liquidity measures.
Why it matters
The Current Ratio helps investors assess whether a company has enough short-term resources to cover obligations due within the next year. Strong liquidity can help a company manage financial stress and operate more flexibly.
A weak current ratio may suggest pressure in meeting near-term commitments.
How it is calculated
Current Ratio = Current Assets ÷ Current Liabilities
How to read it
A Current Ratio above 1 generally means current assets exceed current liabilities. A ratio below 1 may suggest that short-term obligations are greater than short-term resources.
However, an unusually high ratio is not always positive. It may indicate that assets are not being used efficiently.
When it may not be available
This ratio may not be shown for certain financial companies, where liquidity is assessed differently from non-financial businesses.