Current Ratio

What is Current Ratio

The current ratio is a financial ratio that measures a company's ability to pay its short-term debts using its current assets. It is calculated by dividing a company's current assets by its current liabilities.

Current assets are assets that are expected to be converted into cash or used up within one year or less. Examples of current assets include cash and cash equivalents, accounts receivable, and inventory. Current liabilities are debts that are due within one year or less. Examples of current liabilities include accounts payable and short-term loans.

The current ratio is an important financial metric because it indicates a company's liquidity and its ability to meet its short-term obligations. A high current ratio may indicate that a company is in good financial health and has sufficient assets to pay its debts, while a low current ratio may indicate that the company is struggling to meet its short-term financial obligations.

It is important to note that the ideal current ratio will vary depending on the industry in which a company operates. Some industries have higher current ratios than others, and what is considered a "healthy" current ratio may also vary depending on the specific circumstances of a company.