The current ratio measures a company’s ability to meet short-term obligations using its current assets.
It is calculated as current assets divided by current liabilities. Current assets commonly include cash, accounts receivable, inventory, and short-term investments; current liabilities are debts and other obligations due within the normal operating cycle or roughly one year. A ratio of 2.0 means the company reports two units of current assets for every unit of current liabilities.
A ratio below 1 can signal potential difficulty paying near-term bills, but it is not an automatic sign of failure. Businesses that collect cash quickly or negotiate long payment terms may operate safely with a lower figure. Conversely, an unusually high ratio can suggest idle cash, excess inventory, or inefficient working-capital management.
The current ratio differs from the quick ratio because the quick ratio excludes less-liquid items such as inventory and prepaid expenses. The cash ratio is stricter still, counting only cash and near-cash resources.