﻿

# Current ratio

Indicator of short-term debt paying ability. Determined by dividing current assets by current liabilities. The higher the ratio, the more liquid the company. The New York Times Financial Glossary

* * *

* * *

The current ratio is a measure of a company's ability to meet its short-term liabilities and is calculated by dividing the current assets by the current liabilities. Current assets are made up of cash and cash equivalents ('near cash'), accounts receivable and inventory, while current liabilities are the sum of short-term loans and accounts payable.
The current ratio's normal range is between 0.5 and 2.0, but this 'liquidity ratio' must be interpreted with caution. A high ratio could indicate that the company is sitting on too much cash, that it is owed a lot of money by its customers or that it needs to operate with huge amounts of inventory. A low ratio does not necessarily mean the company is a risky creditor. It could mean the company operates in an industry where cash payment is standard (such as restaurants, which typically have little or no accounts receivable), in an industry that operates without much inventory (most service sector companies) or an industry in which customers pay slowly (such as the building sector).
Formula: Current Assets/Current Liabilities Example
The Old Rope Corporation's annual report shows the following figures, in millions of British pounds:
Current assets: 760
Cash at bank and in hand 45
Short-term investments 35
Accounts receivable 250
Stocks 430
Current liabilities 840
Current ratio: 760 / 840 = 0.9

* * *

current ratio UK US noun [C] (also acid ratio, also acid-test ratio, also liquid ratio)
ACCOUNTING, FINANCE a measure of a company's ability to pay costs and make necessary payments in the near future. The current ratio is calculated by dividing the value of a company's current assets by its current liabilities: »

This is the highest current ratio that the company has achieved in over 10 years.

### Look at other dictionaries:

• current ratio — The ratio obtained by dividing current assets by current liabilities to measure ability of the firm to pay short term debt from readily available funds. Related links gearing Practical Law Dictionary. Glossary of UK, US and international legal… …   Law dictionary

• Current ratio — The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm s current assets to its current liabilities. It is expressed as follows: For example, if… …   Wikipedia

• current ratio — The ratio obtained when total current assets are divided by total current liabilities. A commonly used but not always good proxy for a firm s liquidity. American Banker Glossary Indicator of short term debt paying ability. Determined by dividing… …   Financial and business terms

• Current Ratio — A liquidity ratio that measures a company s ability to pay short term obligations. The Current Ratio formula is: Also known as liquidity ratio , cash asset ratio and cash ratio . The ratio is mainly used to give an idea of the company s ability… …   Investment dictionary

• current ratio — Fin a ratio of current assets to current liabilities, used to measure a company’s liquidity and its ability to meet its short term debt obligations. EXAMPLE The current ratio formula is a simple one: Current assets/Current liabilities = Current… …   The ultimate business dictionary

• Current Ratio — Liquiditätsgrade sind insbesondere in der Unternehmensfinanzierung und der Finanzbuchhaltung verwendete betriebswirtschaftliche Kennzahlen, mit denen die Fähigkeit eines Unternehmens, seinen Zahlungsverpflichtungen fristgerecht nachzukommen,… …   Deutsch Wikipedia

• current ratio — working capital ratio The ratio of the current assets of a business to the current liabilities, expressed as x:1 and used as a test of liquidity. For example, if the current assets are £250,000 and the current liabilities are £125,000 the current …   Accounting dictionary

• current ratio — working capital ratio The ratio of the current assets of a business to the current liabilities, expressed as x:1 and used as a test of liquidity. For example, if the current assets are £250, 000 and the current liabilities are £125, 000 the… …   Big dictionary of business and management

• current ratio — noun : the ratio between current assets and liabilities used in appraising credit worthiness of a business * * * the ratio between current assets and current liabilities. * * * current ratio, the ratio of current assets to current liabilities …   Useful english dictionary

• Current ratio —   The ratio of current assets divided by current liabilities that shows the ability of a utility to pay its current obligations from its current assets. A measure of liquidity, the higher the ratio, the more assurance that current liabilities can …   Energy terms