The current ratio is a financial metric used to assess a company’s short-term liquidity and its ability to cover immediate financial obligations with its current assets.
The current ratio is calculated using the following formula:
Current ratio = total current assets / total current liabilities
A current ratio greater than 1 indicates that a company has more current assets than current liabilities, while a current ratio of less than 1 implies that a company may have difficulty meeting its short-term obligations using its current assets alone. A higher current ratio indicates a healthier level of working capital.
The ‘ideal’ ratio is between 1.5 and 2. The current ratio provides a snapshot of a company’s short-term liquidity, but it doesn’t offer insight into the company’s ability to generate cash in the future.
The current ratio, along with other financial ratios, is typically disclosed in a company’s financial statements, providing transparency to stakeholders about its short-term liquidity position.