current ratio

Definition

An indication of a company's ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is. Current ratio is equal to current assets divided by current liabilities. If the current assets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial strength. If current liabilities exceed current assets, then the company may have problems meeting its short-term obligations.

For example, if XYZ Company's total current assets are $10,000,000, and its total current liabilities are $8,000,000, then its current ratio would be $10,000,000 divided by $8,000,000, which is equal to 1.25. XYZ Company would be in relatively good short-term financial standing.

Also see: List of Important Financial Ratios for Stock Analysis at InvestorGuide.com.

Use current ratio in a sentence

I found a company in the stock market with a low stock price suggesting it was facing financial difficulties, but when I looked at the company's balance sheet its current ratio suggested that it would be able to pay off its short term debts without any financial trouble.

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US Bank was happy to offer ABC Company a short term loan at a competitive rate because their high current ratio and past credit history made them a very low risk borrower.

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Before I do business with a company I check it's current ratio, which is their ability to pay back their debts and payable accounts with cash, inventory or receivables.

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current cash debt coverage ratio quick ratio