Current Ratio
The current ratio divides a company's current assets by its current liabilities, measuring its ability to pay obligations due within one year.
The current ratio is a basic measure of short-term financial health. It compares what a company owns that can be turned into cash within a year, such as cash, receivables and inventory, with what it owes within a year, such as supplier bills, short-term debt and wages.
The formula is current assets divided by current liabilities.
Example: a company has $300 million in current assets and $200 million in current liabilities. Its current ratio is 1.5, meaning it has $1.50 of short-term assets for every $1 of short-term obligations.
A ratio below 1 can signal that a company might struggle to pay its near-term bills without raising money, although some businesses with very fast cash turnover, such as large retailers, operate safely with low ratios. A very high ratio can mean the company is holding more cash or inventory than it needs.
Because inventory is not always easy to sell quickly, analysts also use the quick ratio, which excludes inventory, and the cash ratio, which counts only cash and equivalents.
The current ratio is best compared with industry peers and tracked over time.