Current (Liquidity) Ratio Definition
The current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations with its current assets. The current ratio is calculated by dividing a company’s total current assets by its total current liabilities.
A company’s short-term obligations include items such as accounts payable, taxes payable, and interest payable. Current assets include items such as cash, accounts receivable, inventory, and short-term investments.
The ideal current ratio varies by industry. For example, companies in the retail industry typically have a higher current ratio than companies in the technology industry because it takes longer for retail companies to convert their inventory into cash.
In general, a current ratio of 2:1 is considered strong. This means that the company has twice as many current assets as it does current liabilities. A current ratio below 1:1 may indicate that the company is having difficulty meeting its short-term obligations.
