Definition
Current Ratio
The current ratio measures a company's ability to pay short-term obligations using its short-term assets.
Current Ratio = Current Assets / Current Liabilities. A ratio above 1 means the company has more short-term assets (cash, receivables, inventory) than short-term dues, indicating reasonable liquidity. A ratio near or below 1 can signal cash-flow stress.
A very high current ratio isn't always good, it may mean idle cash or piled-up inventory. The quick ratio (excluding inventory) is a stricter version. Always compare against industry norms, since working-capital needs differ across sectors.
Related terms
- Debt-to-Equity RatioThe debt-to-equity ratio compares a company's total borrowings to its shareholders' equity, gauging how leveraged (and risky) its balance sheet is.
- Free Cash FlowFree cash flow (FCF) is the cash a company has left after paying operating expenses and capital expenditure, available to reward investors or grow.
- LiquidityLiquidity is how easily an asset can be bought or sold quickly without significantly moving its price.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.