Current Ratio Analysis
Definition
Interpreting the current ratio — current assets divided by current liabilities — to judge whether a business can meet its short-term obligations. A ratio comfortably above one is generally healthier, though the ideal varies by industry.
Formula
Current ratio = Current assets ÷ Current liabilities
Related Terms in Financial Analysis
Acid-Test Ratio
A stricter liquidity measure than the current ratio, excluding inventory from current assets because it may not convert quickly to cash. Also known as the quick ratio.
Cash Ratio
The most conservative liquidity ratio, comparing only cash and cash equivalents to current liabilities. It shows whether a business could cover short-term debts without relying on receivables or inventory.
Debt Ratio
Total liabilities as a proportion of total assets, showing how much of a business is financed by debt rather than equity. A higher ratio means greater financial leverage and risk.
Interest Coverage Ratio
A measure of how comfortably a business can pay interest on its debt from operating profit. A higher ratio means more cushion; a ratio near one signals that earnings barely cover interest.
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