Current Ratio

Current Ratio: The current ratio is a financial metric used to evaluate a company’s ability to pay its short-term liabilities with its short-term Assets. It is calculated by dividing a company’s current Assets by its Current Liabilities. A higher ratio indicates better Liquidity, meaning the company is more capable of covering its short-term obligations.

Formula: Current Ratio = Current Assets / Current Liabilities

Examples:

• If a company has current Assets of $200,000 and Current Liabilities of $100,000, the current ratio would be 200,000 / 100,000 = 2.0. This means the company has $2 in Assets for every $1 in liabilities.
• If another company has current Assets of $150,000 and Current Liabilities of $200,000, the current ratio would be 150,000 / 200,000 = 0.75. This indicates the company may struggle to meet its short-term obligations.

Use Cases:

• A current ratio of less than 1 suggests that a company may not have enough Assets to cover its short-term liabilities, which can be a red flag for investors.
• A current ratio of around 1.5 to 2 is generally considered healthy, indicating good short-term financial stability.