Current Ratio: Liquidity Measure
The current ratio measures a company's ability to pay short-term obligations with short-term assets.
The Formula
Current Ratio = Current Assets ÷ Current Liabilities
Interpretation
- <1.0: Potential liquidity problems
- 1.0-1.5: Adequate liquidity
- 1.5-2.0: Good liquidity
- >2.0: Strong liquidity (or inefficient use of assets)
Why It Matters
Companies with low current ratios may struggle to meet obligations, potentially forcing dividend cuts to preserve cash.