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The current ratio is a liquidity characteristic that indicates the extent to which a company can meet its current liabilities with its current assets. The ratio is calculated by dividing current assets by current liabilities. Current assets include cash, bank, inventory and accounts receivable. A ratio above 1 means that the company theoretically has sufficient funds to meet its immediate liabilities. Assessing the level of the ratio depends on sector and business model.
Within credit analysis, the current ratio is used to assess short-term risk. A declining ratio can indicate increasing pressure on the liquidity position. The key number is often combined with other ratios for a complete financial picture.
When a company has 500,000 euros in current assets and 400,000 euros in current liabilities, the current ratio is 1.25.
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