ConceptReviewed
Current Ratio
Name variants
- English
- Current Ratio
- Kanji
- 流動比率
Quality / Updated / COI
- Quality
- Reviewed
- Updated
- Source
- Citations & Trust
- COI
- none
TL;DR
The current ratio measures short-term liquidity by comparing current assets to current liabilities.
Definition
Current ratio is calculated as current assets divided by current liabilities. It indicates whether a firm can meet obligations due within a year using near-term assets such as cash, receivables, and inventory. A very high ratio may signal inefficient asset use, so industry context is essential.
Decision impact
- Assesses short-term solvency and working-capital needs.
- Identifies whether inventory or receivables management requires attention.
- Supports credit terms negotiations with lenders or suppliers.
Key takeaways
- Define current assets and liabilities consistently for accuracy.
- Inventory quality affects how meaningful the ratio is.
- Receivables collection speed can change the ratio quickly.
- Compare against industry norms rather than a single rule.
- Use alongside cash-flow metrics for better insight.
Misconceptions
- A higher ratio always means healthier liquidity.
- A ratio below 1 always signals failure.
- Cash flow analysis is unnecessary if the ratio is strong.
Worked example
A retailer shows a current ratio of 1.9 but holds slow-moving inventory. After tightening inventory management and improving collections, the ratio drops to 1.5 while cash flow improves. The business becomes more resilient despite the lower ratio. The team reviews outcomes with stakeholders and updates the plan, which stabilizes results over time.
Citations & Trust
- Financial Accounting (OpenStax)