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Current Ratio: Definition and Meaning
Definition
The current ratio is a liquidity measure calculated by dividing current assets by current liabilities.
Why It Matters
The current ratio is one indicator of a business’s ability to meet near-term obligations. A higher ratio may suggest greater short-term coverage, but the ratio should not be viewed in isolation. The quality of receivables, cash availability, inventory turnover, debt terms, and cash-flow timing also matter.
Lenders, sureties, owners, and management may consider the current ratio as part of a broader assessment of financial strength.
Example
A business has $300,000 in current assets and $150,000 in current liabilities. Its current ratio is 2.0.
Related Terms
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