Current ratio is a ratio that equals the firm’s current assets divided by its current liabilities, provides another picture of the relationship between its current assets and current liabilities and can tell us more about the firm’s ability to pay its short-term debts.The current ratio is a widely used measure for evaluating a company’s liquidity and short-term debt-paying ability.
It is a measure of a company’s liquidity; computed as current assets divided by current liabilities.
The current ratio permits us to compare the liquidity of different-sized companies and of a single company at different times.
Current ratio = Current assets ÷ Current liabilities
The current ratio is sometimes referred to as the working capital ratio; working capital is current assets minus current liabilities. The current ratio is a more dependable indicator of liquidity than working capital. Two companies with the same amount of working capital may have significantly different current ratios.
The current ratio is only one measure of liquidity. It does not take into account the composition of the current assets. For example, a satisfactory current ratio does not disclose the fact that a portion of the current assets may be tied up in slow moving inventory. A dollar of cash would be more readily available to pay the bills than a dollar of slow-moving inventory.
Current ratio is an expression of a firm’s ability to pay its current debts from its current assets. (Found by dividing current assets by current liabilities).
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