Current ratio

Current ratio
Indicator of short-term debt paying ability. Determined by dividing current assets by current liabilities. The higher the ratio, the more liquid the company. The New York Times Financial Glossary

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   The current ratio is a measure of a company's ability to meet its short-term liabilities and is calculated by dividing the current assets by the current liabilities. Current assets are made up of cash and cash equivalents ('near cash'), accounts receivable and inventory, while current liabilities are the sum of short-term loans and accounts payable.
   The current ratio's normal range is between 0.5 and 2.0, but this 'liquidity ratio' must be interpreted with caution. A high ratio could indicate that the company is sitting on too much cash, that it is owed a lot of money by its customers or that it needs to operate with huge amounts of inventory. A low ratio does not necessarily mean the company is a risky creditor. It could mean the company operates in an industry where cash payment is standard (such as restaurants, which typically have little or no accounts receivable), in an industry that operates without much inventory (most service sector companies) or an industry in which customers pay slowly (such as the building sector).
   Formula: Current Assets/Current Liabilities Example
   The Old Rope Corporation's annual report shows the following figures, in millions of British pounds:
   Current assets: 760
   Cash at bank and in hand 45
   Short-term investments 35
   Accounts receivable 250
   Stocks 430
   Current liabilities 840
   Current ratio: 760 / 840 = 0.9

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current ratio UK US noun [C] (also acid ratio, also acid-test ratio, also liquid ratio)
► ACCOUNTING, FINANCE a measure of a company's ability to pay costs and make necessary payments in the near future. The current ratio is calculated by dividing the value of a company's current assets by its current liabilities: »

This is the highest current ratio that the company has achieved in over 10 years.


Financial and business terms. 2012.

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