Current Ratio
Definition
A liquidity measure comparing what you own that turns into cash within a year with what you owe within a year.
Want a deeper explanation?
Formula
Current Ratio = Current Assets ÷ Current LiabilitiesLenders often look for a current ratio above 1.0 to 1.5. For inventory businesses, though, it can look healthy while cash is tight, because much of the current assets is stock that has not sold yet.
That is why it is best read alongside the quick ratio. Watch for: a strong current ratio driven by aging inventory, which can hide a real cash squeeze.
Example
$420,000 of current assets and $280,000 of current liabilities gives a current ratio of 1.5.