What does current ratio mean?
Current ratio compares a company’s current assets to its current liabilities, essentially measuring a company’s ability to fulfil short-term financial obligations. It’s a good indicator of financial health and can warn of impending issues if the ratio is too low or even too high.
A company’s current ratio should be roughly in line with industry averages, as a ratio that’s too high could indicate that assets are being used inefficiently, while a low ratio could mean financial or management problems.
Key takeaways from this section:
- Current ratio compares a business’s current assets with its current liabilities and shows its ability to pay short-term debts.
- When using current ratio to assess a company’s financial health, it should be taken in context with past performance and other similar companies in the same industry.
- Current ratio only provides a surface-level look at the financial health of a company, and further analysis is needed to understand the nature of current assets and how easily liquidated they are.