Current Ratio
From Financial Literacy Wiki
The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm's current assets to its current liabilities. It is expressed as follows:
Current ratio = Current Assets/Current Liabilities
(Current Ratio is equal to Current Assest divided by Current Liabilities)
For example, if TUV Company's current assets are $80,000,000 and its current liabilities are $50,000,000, then its current ratio would be $80,000,000 divided by $50,000,000, which equals 1.60. It means that for every dollar the company owes it has $1.60 available in current assets. A current ratio of assets to liabilities of 2:1 is usually considered to be acceptable (ie., your assets are twice your liabilities).
The current ratio is an indication of a firm's ability to meet short-term debt obligations. Acceptable current ratios vary from industry to industry. If a company's current assets are in this range, then it is generally considered to have good short-term financial strength. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently utilizing its current assets.
Because current ratio is a measure of meeting short-term debt obligations, sometimes to it might be better to check how much the current assets is made up of receivables as all receivables carry credit risks, and depending greatly collections activity and policies to turn them into cash which is the most liquid.
