A liquidity measure (also, a short-term solvency measure) that relates current assets to current liabilities:
This ratio is a measure of short-term liquidity because current assets and liabilities are essentially converted to cash over the financial year of a company. For example, if current assets and current liabilities of a hypothetical company are $70,000 and $50,000 respectively, then its current ratio is:
Current ratio= 70,000/ 50,000 = 1.4
This can be interpreted as follows: this company has $1.4 in current assets for every $1 in current assets, or the company has its current liabilities covered 1.4 times over. To the company, a high current ratio indicates liquidity, but it also may imply an inefficient use of cash (idle cash) and other short-term assets. To creditors (such as suppliers), the higher the current ratio, the better. In general, a current ratio of 1 is normal; a current ratio of less than 1 would reflect negative net working capital (NWC).
