What Is Current Ratio?
The current ratio measures a company’s ability to pay its financial obligations within the year.
It is calculated by taking its current assets divided by its current liabilities.
Current Ratio = Current Assets / Current Liabilities
Current assets include things like inventories, trade receivables, and cash and cash equivalents.
Meanwhile, current liabilities include short-term borrowings and trade payables.
Those items mentioned above can be found under the balance sheet of a company’s financial statements.
How to Make Sense of a Company’s Current Ratio?
A current ratio above one suggests that the company is capable of meeting its obligations for the year.
A ratio below one suggests that the company would be unable to pay off its obligations if they come due.
Too high a ratio is not necessarily good as it shows that the company is not utilising its assets efficiently.