Current Ratio Definition
The current ratio is a financial ratio that measures whether or not a company has enough resources to pay its short-term obligations. The current ratio is calculated by dividing a company’s current assets by its current liabilities.
A company’s current assets are those assets that can be easily converted into cash within one year. Current assets include things like cash and investments, accounts receivable, and inventory.
A company’s current liabilities are those obligations that are due within one year. Current liabilities include things like accounts payable, taxes payable, and wages payable.
The ideal current ratio is 2:1, which means that a company has twice as many current assets as it does current liabilities. A ratio lower than 2:1 may indicate that a company is in financial trouble, while a ratio higher than 2:1 may indicate that a company is not using its resources efficiently.
