Current Ratio
What is it? A companys current assets (typically cash + receivables + inventory) divided by its current liabilities (debt due within a year). This ratio gives you a sense of a companys ability to meet all short-term liabilities with liquid assets, should it need to. A ratio of 1 implies adequate current assets to cover current liabilities, and the higher above 1, the better. This ratio is an adequate measure of financial strength in the short term, and can be used on a comparative basis among companies. You must, however, be careful not to make implicit assumptions about a companys earnings or cash flow sustainability simply from the current ratio.Added By: Andrew
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