The liquidity ratio that measures a company’s ability to pay off short-term obligations. The higher the ratio, the more liquidity the company has. Current ratio is calculated be dividing current assets (cash, inventory, receivables) by current liabilities (debt and payables). When current assets are more than twice current liabilities, then that company is considered to have good short-term financial strength. When current liablities exceed current assets by a ratio under 1, the company may have problems meeting its short-term obligations if they came due at that point.
While a low current ratio suggests that the company is not in great financial health, it does not necessarily mean that bankruptcy is unavoidable, since financing may be available. However it is not a good sign.
(Also known as “liquidity ratio”, “cash asset ratio” and “cash ratio”.)
