Current Ratio

Current Ratio: This ratio is widely used as a measure of short-run solvency, i.e., the ability of a business to pay its current debts as they come due. The Current Ratio is the ratio of Current Assets (assets easily converted to cash) and Current Liabilities (bills and debts due within 12 months).  Potential creditors use this ratio to measure a company’s liquidity or ability to pay off short-term debts. Because creditors have such concerns about a company being able to pay a loan, this ratio should be monitored often to make sure if a loan is needed the company is in a good position to get a loan approved. It is a common practice to renegotiate short-term liabilities (an element in current liabilities) into long-term liabilities such as short term loans to improve on the current ratio by reduce the current liabilities.

Current Ratio formula: Current Assets/Current Liabilities