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.