The current ratio measures short-term liquidity by dividing current assets by current liabilities, showing whether a business can cover its near-term obligations.
The current ratio = current assets ÷ current liabilities. A ratio above 1.0 means current assets exceed current liabilities, suggesting the business can meet its obligations over the next year. Lenders watch it closely as a solvency signal, and loan covenants often require a minimum current ratio.
Context matters: a very high ratio can signal idle cash or slow-moving inventory rather than strength, while a ratio near or below 1.0 warns of a potential liquidity squeeze. It is a snapshot, best read alongside cash flow and the quicker, stricter quick ratio.
A company with $150,000 in current assets and $100,000 in current liabilities has a current ratio of 1.5, meaning it has $1.50 of short-term assets for every $1 of short-term obligations.
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