Current Ratio - Formula, Meaning, Assumptions and Interpretations
The current ratio is the most popularly used metric to gauge the short term solvency of a company. This article provides the details about this ratio.
Current Ratio = Current Assets / Current Liabilities
Current ratio measures the current assets of the company in comparison to its current liabilities. This means that the firm expects to collect cash from the people that owe it money and pay to the ones that they owe money to on time. Hence if the current ratio is 1.2:1, then for every 1 dollar that the firm owes its creditors, it is owed 1.2 by its debtors.
The ideal current ratio is 2 meaning that for every 1 dollar in current liabilities, the company must have 2 in current assets. However, this varies widely based on the industry in which the company is functioning.
The current ratio makes two very important assumptions. They are as follows:
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