Current Ratio

The Current Ratio is a liquidity metric that measures a company's ability to meet its short-term liabilities (due within one year) using its short-term assets (expected to be converted to cash within one year). It is calculated as: Current Ratio = Current Assets ÷ Current Liabilities. A ratio above 1 indicates that a company has more current assets than current liabilities, suggesting adequate short-term liquidity. A ratio below 1 signals potential liquidity stress. While a higher ratio is generally safer, an excessively high ratio can indicate idle assets or poor working capital management. The appropriate current ratio varies by industry — capital-light businesses like IT services typically run lower ratios than manufacturing or retail businesses with large inventory and receivable cycles.