Current Ratio
The current ratio is a financial metric that measures a company’s ability to pay its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities. A higher ratio indicates better liquidity and a greater ability to meet short-term obligations. A current ratio of 1 or higher is generally considered acceptable, meaning the company has enough assets to cover its liabilities.
Example
A company with $500,000 in current assets and $250,000 in current liabilities has a current ratio of 2.0, indicating it has twice as many assets as liabilities to meet short-term obligations.
Key points
• The current ratio measures a company’s ability to pay short-term liabilities using its current assets.
• It is calculated by dividing current assets by current liabilities.
• A ratio of 1 or higher is generally considered a good indicator of liquidity.
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