The current ratio is a financial ratio that measures a company's ability to cover its short-term liabilities with its short-term assets. It is calculated by dividing the company's current assets by its current liabilities. The formula for the current ratio is as follows:
Current Ratio = Current Assets / Current Liabilities
The current ratio is an important indicator of a company's liquidity and short-term financial health. It helps assess whether a company has enough current assets to meet its current obligations. A ratio of 1 or higher is generally considered favorable, as it indicates that a company has sufficient current assets to cover its current liabilities. On the other hand, a ratio below 1 suggests that a company may have difficulty meeting its short-term obligations.
It's important to note that the current ratio should be interpreted in the context of the industry in which the company operates. Different industries have different norms and standards for liquidity, so what may be considered a good current ratio in one industry may not be the same in another. Additionally, it's also important to compare the current ratio of a company over time to identify any trends or changes in its liquidity position.