What does Current Ratio mean?

This metric helps you estimate your company’s ability to pay off its outstanding bills (accounts payable) and short-term debt.

How it's calculated

This metric takes current assets and divides that by current liabilities.

What's better?

Higher

What it means

This metric helps you estimate your company’s ability to pay off its outstanding bills (accounts payable) and short-term debt. It tells you if your company has enough cash and accounts receivable (customer invoices) to pay debts that are due within the next 12 months.

A current ratio greater than 1.0 indicates that a business has enough cash available to pay off its short-term debts. For example, a company with a current ratio of 2.0 has $2.00 of cash/liquid assets available to cover each $1.00 of current liabilities. A company in this situation has twice the cash/liquid assets it needs to cover its short-term debt. On the other hand, a company with a current ratio of .5 only has fifty cents to cover each $1.00 of its short-term debt, which can spell disaster for that company if the debts suddenly become due and payable.

 

(Source: LivePlan.com)