Thursday, July 2, 2015

Current Ratio

Definition of 'Current Ratio'

A liquidity ratio that measures a company's ability to pay short-term obligations,

The Current Ratio formula is:
                                                                     Current Assets
                                        Current Ratio =  Current Liabilities

Also known as "liquidity ratio", "cash asset ratio" & "cash ratio",

Expertsmind,com explains 'Current Ratio'

The ratio îs mainly used to give idea of company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables), The higher current ratio, more capable company îs of paying its obligations, A ratio under 1 suggests that company would be unable to pay off its obligations if they came due at that point, While this shows company îs not în good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it îs definitely not good sign,

The current ratio can give sense of efficiency of company's operating cycle - its ability to turn its product into cash, Companies that have trouble getting paid on their receivables - have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations, Because business operations differ în each industry, it is always more useful to compare companies within same industry,

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