Current ratio
Current ratio is current assets divided by current liabilities, measuring a business's ability to pay its short term obligations.
The current ratio is one of the most widely used liquidity measures, found by dividing current assets by current liabilities. Current assets include cash, accounts receivable, and inventory, anything expected to become cash within a year. Current liabilities include accounts payable and the portion of debt due within that same year. A current ratio of 2 means the business holds twice as many short term assets as short term debts, while a ratio of 1 means the two are even and below 1 means short term debts exceed liquid resources.
Lenders rely on the current ratio as a fast check on whether a business can meet its obligations without strain. A ratio comfortably above 1 tells an underwriter there is a cushion to absorb a new payment, while a ratio under 1 prompts closer scrutiny of cash flow and timing. Different industries carry different norms, so a lender weighs the number against what is typical for your field. The current ratio is closely related to the working capital ratio, and many people use the two names for the same calculation.
Common questions
Is the current ratio the same as the working capital ratio?
In most cases yes. Both divide current assets by current liabilities to measure short term financial health, and the names are often used interchangeably. The takeaway for a borrower is the same either way: a ratio comfortably above 1 shows a lender you can cover near term bills and take on a new payment.
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