The current ratio measures whether a company can cover short-term liabilities with short-term assets.
It is calculated by dividing current assets by current liabilities. Current assets commonly include cash, marketable securities, accounts receivable, and inventory. Current liabilities are obligations generally due within one year, such as accounts payable and short-term borrowings.
A ratio above 1 means current assets exceed current liabilities at that reporting date, but it does not guarantee that every bill can be paid easily. Inventory may take time to sell, and receivables may not be collected immediately. A very high ratio can also suggest that resources are being used inefficiently.
The current ratio is a liquidity measure, not a profitability or valuation measure. The quick ratio is a related measure that excludes inventory and some other less-liquid current assets. Analysts compare ratios with industry norms because retail, manufacturing, banking, and technology companies have very different operating models.