UK Accounting Glossary
The current ratio is balance-sheet financial performance measure of company liquidity. The current ratio is calculated by dividing current assets by current liabilities. A current ratio of more than 1.0 means that a company’s short term assets exceed its short term liabilities. For example, if Tractorco has current assets of $12 million and current liabilities of $10 million then the current ratio for Tractorco is 1.20 or 1.2x. Although a current ratio of 2.0 or 2x means that a company has great short term financial strength, a current ratio of less than 1.0 does not necessarily signal problems unless this weak current ratio shows a persistent inability of a company to meet short term obligations. The current ratio is often calculated in conjunction with a second ratio, the “quick ratio” which subtracts inventories from current assets before dividing by current liabilities. Both quick ratio and current ratio “normal” measures vary greatly by industry and a comparison of current ratio with other companies within the same industry or sector is helpful in determining an investment’s current ratio quality.
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This glossary post was last updated: 4th February 2020.