Current Ratio
Definition
Current assets divided by current liabilities, a measure of whether a business can meet obligations falling due within a year. Above 1 means current assets cover current liabilities; what counts as healthy varies sharply by industry.
Related Terms in Financial Analysis
Quick Ratio
A stricter liquidity test than the current ratio, dividing only cash, marketable securities and receivables by current liabilities. Inventory and prepayments are excluded because they cannot be relied on to convert to cash quickly. Also called the acid-test ratio.
Debt-to-Equity Ratio
Total liabilities divided by shareholders equity, showing how much of the business is funded by creditors against owners. A higher ratio raises returns when trading well and magnifies losses when it does not.
EBITDA
Earnings before interest, taxes, depreciation and amortisation: a proxy for operating cash generation that strips out financing and accounting policy choices. Widely used in valuation, but it is not a GAAP or IFRS measure and ignores both capital spending and working capital.
Operating Income
Profit from core trading activity: gross profit less operating expenses, before interest and tax. Also called operating profit or EBIT, it isolates how well the business performs independently of how it is financed.
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