Current Ratio
Ratios are used to measure the performance of a company.
The Current Ratio is used to determine the liquidity of a company.
To determine the Current Ratio divide Current Assets by Current Liabilities.
Current Ratio = Current Assets / Current Liabilities
Current assets are items that include cash or can be converted to cash in a short time such as inventory, accounts receivables, and notes receivable.
Current Liabilities are obligations that a company expects to pay within a short time. Current liabilities include accounts payable, and currently due notes payable among other obligations.
Why does it matter? A company's current ratio is an indication of their ability to pay upcoming expenses. A very low ratio means that the company is struggling to stay ahead of its debts and may not be able to cover them all in a timely matter. Among current assets is cash, and when it comes to paying obligations, cash is king.
