Meaning
Current ratio compares short-term assets with short-term liabilities.
Formula
Current assets / current liabilities
Practical reading
Values below 1 can be a liquidity warning, but normal levels vary by industry.
Calculation detail
Current ratio = current assets / current liabilities. Current assets normally include cash, receivables and inventory that are expected to turn into cash within a year.
What to check
Compare it with the company's normal operating cycle. Retailers may operate with lower ratios because inventory turns quickly, while a manufacturer may need a larger buffer.
Limits and caveats
A high ratio is not automatically good if it is caused by old inventory or receivables that are difficult to collect.