Current Ratio

What is the Current Ratio?

The current ratio is a relative valuation metric that measures liquidity. It measures how well a company can pay back short-term debts using its current assets.

Usually, when comparing the current ratio between similar companies, a high current ratio could indicate that the company is financially healthy, whereas a low current ratio might indicate that the company is encountering a risk of now able to pay back the debt.

Calculation

• Current Ratio = Current Assets ÷ Current Liabilities

How to Apply the Current Ratio?

Generally, investors compare similar companies that are in the same industry with their current ratio and rank them based on their performances. The reason is that companies under different industries and having different businesses varies in their asset structures, which makes the comparison inconclusive if an inappropriate comparison is used.

Compare and Contrast: Quick Ratio

Calculation

The calculation of the quick ratio is as follows:

The formula compares the current assets (assets that can be easily liquidated) with current liabilities (AKA short-term debts).

• Quick Ratio = (Cash, Cash Equivalent+ Market Securities + Account Recievables) ÷ (Current Liabilities)