Investing term

What is Current ratio?

Current assets ÷ current liabilities. Above 1 means the company can cover next year's bills from current assets.

The current ratio is current assets divided by current liabilities — a quick gauge of whether a company can pay its near-term bills. Above 1 means current assets more than cover what's due within the year. Far below 1 can signal a liquidity squeeze; very high can mean cash sitting idle. It's a first, fast read on short-term solvency.

For example

$3M of current assets against $2M of current liabilities gives a current ratio of 1.5 — comfortable coverage of the coming year's obligations.

Current ratio is taught hands-on in Stage 14 — Reading Financial Statements.

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Related terms

Accounts receivable (A/R)Money customers owe the company for goods or services already delivered but not yet paid.AccrualsAccounting entries that record revenue or expense before cash actually moves.Annual reportThe yearly disclosure that includes audited financials, MD&A, and footnotes — the primary source for serious investors.Balance sheetThe 'photo' statement — what the company owns, what it owes, and what's left for owners, on a single date.
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