Current Ratio
Current ratio is equal to current assets divided by current liabilities. It is an indication of company's ability to pay its short term liability with its short term assets. A current ratio of 2 or more is generally desirable, as it would indicate that the company is in good financial condition. If it's bellow 1, it could mean that company would not be able to pay off its short term liabilities, at that time, as it does not have enough cash on hand (it's not liquid). There are many other important indicators, and bad current ratio alone does not mean that company will go bankrupt.
A current ratio that is too high is not desirable as well. It could mean that the company is not using assets to grow the business, which could hurt it in the long run.
Current ratio varies through the industries so make sure that you compare the companies from the same industry. Some industries will require of companies to have more cash on hand, to survive the potential recession. The high current ratio would, in this case, make sense.
| Related Terms: |