Friday, May 14, 2010

Current Ratio

What is Current Ratio?

An indication of a company's ability to meet short-term debt obligations; the higher theratio, the more liquid the company is. Current ratio is equal to current assets divided bycurrent liabilities. If the current assets of a company are more than twice the currentliabilities, then that company is generally considered to have good short-term financialstrength. If current liablities exceed current assets, then the company may haveproblems meeting its short-term obligations. For example, if XYZ Company's total current assets are $10,000,000, and its total current liabilities are $8,000,000, then its current ratio would be $10,000,000 divided by $8,000,000, which is equal to 1.25. XYZ Company would be in relatively good short-term financial standing. (