Current ratio
The current ratio compares everything a company expects to turn into cash within a year with everything it must pay within a year. It is the broadest measure of short-term solvency.
Formula
Current ratio
Current Ratio = Current Assets ÷ Current Liabilities
Benchmark: Above 1 is the floor; between 1.5 and 2 is comfortable for most manufacturers
Reading the number
Current assets include cash, liquid investments, receivables owed by customers, and inventory. Current liabilities include supplier bills, short-term loans, and the portion of long-term debt due this year. A ratio below 1 means the company cannot cover the next twelve months of obligations from what it has, and will depend on new borrowing or on selling more.
The current ratio is generous because it counts inventory and receivables as if they were cash. Inventory can be unsellable and receivables can bounce. That is why the quick ratio strips them out. Read the two together: a healthy current ratio with a weak quick ratio means the "liquidity" is really stock sitting in a warehouse.
Indian example
Related ratios
Glossary terms
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