Current Ratio is a financial metric which indicates a company's ability to meet short-term debt obligations. A high Current Ratio figure implies short term financial strength / liquidity.
Current Ratio is a financial metric which indicates a company's ability to meet short-term debt obligations. A high Current Ratio figure implies short term financial strength / liquidity. Current Ratio is also known as Working Capital Ratio.
Current Ratio Formula
The current ratio is calculated by dividing current assets by current liabilities. Both figures are provided on the company balance sheet.
Current Ratio Interpretation
All other things being equal, creditors consider a high current ratio to be better than a low current ratio, because a high current ratio means that the company is more likely to meet its liabilities which are due over the next 12 months. Low values for the current ratio (values less than 1) indicate that a firm may have difficulty meeting current obligations. However, an investor should also take note of a company's operating cash flow in order to get a better sense of its liquidity. A low current ratio can often be supported by a strong operating cash flow.
The higher the ratio, the more liquid the company is. A Current Ratio of 2 is generally acceptable, but this figure can vary from industry to industry. For example, a current ratio of 1.5 may be considered acceptable for industrial companies.
If the current ratio is too high (much more than 2), then the company may not be using its current assets or its short-term financing facilities efficiently. This may also indicate problems in working capital management.