Current Ratio
Can this company pay its short-term bills?
Definition
The current ratio measures a company's ability to pay its short-term obligations using its short-term assets. It is calculated by dividing current assets (cash, receivables, inventory) by current liabilities (accounts payable, short-term debt). A ratio above 1.0 means the company has more short-term assets than liabilities. A ratio below 1.0 raises liquidity concerns. Most healthy companies target a current ratio of 1.5–2.0.
Formula / Rules
Current Ratio = Current Assets ÷ Current Liabilities
Example
A retailer has $500M in current assets (including $200M inventory, $150M receivables, $150M cash) and $300M in current liabilities. Current Ratio = $500M ÷ $300M = 1.67. For every $1 of short-term obligation, they have $1.67 of assets to cover it. This is a healthy ratio, though the inventory component may take time to convert to cash.
Related Terms
Frequently Asked Question
What is the current ratio?
The current ratio measures short-term liquidity — current assets divided by current liabilities. Above 1.0 is generally healthy. It shows whether a company can pay its upcoming bills without taking on new debt.
APA Citation
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· Source: VixShield Trading Glossary — From SPX Mastery by Russell Clark
⚠️ Not financial advice. This definition is educational content from the SPX Mastery book series by Russell Clark (VixShield). Past performance is not indicative of future results. Trading options involves substantial risk of loss and is not appropriate for all investors. Always paper trade before risking real capital.