Current ratio
{{Short description|Liquidity ratio for a firm}}
The current ratio is a liquidity ratio that measures whether a firm has enough resources to meet its short-term obligations. It is the ratio of a firm's current assets to its current liabilities, {{math|{{sfrac|Current Assets|Current Liabilities}}}}.
The current ratio is an indication of a firm's accounting liquidity. Acceptable current ratios vary across industries.{{Cite web|url=http://accounting-simplified.com/financial/ratio-analysis/current.html|title=Current Ratio {{!}} Formula {{!}} Example {{!}} Analysis {{!}} Industry Standards|website=accounting-simplified.com|access-date=2016-10-11}} Generally, high current ratio are regarded as better than low current ratios, as an indication of whether a company can pay a creditor back. However, if a company's current ratio is too high, it may indicate that the company is not efficiently using its current assets.{{Cite news|url=http://www.nasdaq.com/article/5-promising-liquid-stocks-to-boost-your-portfolio-cm683677|title=5 Promising Liquid Stocks to Boost Your Portfolio|date=2016-09-23|newspaper=NASDAQ.com|access-date=2016-10-11}}
A current ratio of less than 1 indicates that the company may have problems meeting its short-term obligations.{{Cite news|url=https://trendshare.org/how-to-invest/what-is-the-current-ratio|title=What is the Current Ratio? {{!}} trendshare|newspaper=Trendshare: find the right price for stocks|access-date=2016-10-11}} However, if inventory turns into cash much more rapidly than the accounts payable become due, then the firm's current ratio can comfortably remain less than one.{{Cite web|url=http://www.fool.com/investing/general/2013/11/30/does-wal-mart-have-a-liquidity-problem.aspx|title=Does Wal-Mart Have a Liquidity Problem?|last=Hargreaves|first=Rupert|website=www.fool.com|date=30 November 2013 |access-date=2016-10-11}} Low current ratios can also be justified for businesses that can collect cash from customers long before they need to pay their suppliers.
To determine liquidity, the quick ratio is also used, which excludes current assets that may not be easily liquidated, like prepaid expenses and inventory.{{Cite news|url=https://explainry.com/finance/current-ratio/|title=Current Ratio: Definition, Formula, Example & Interpretation {{!}} Explainry|work=Explainry|access-date=2017-04-05|language=en-US|archive-date=2017-04-05|archive-url=https://web.archive.org/web/20170405173619/https://explainry.com/finance/current-ratio/|url-status=dead}}