The current ratio measures a company’s liquidity —specifically, how well it can cover short-term obligations with short-term assets. It is calculated as current assets divided by current liabilities.

What it tells you

A ratio above 1 generally means the company has more short-term assets than short-term debts, which suggests it can pay bills due within a year. A ratio below 1 can signal possible short-term cash pressure.

Simple example

If a company has 200,000 in current assets and 100,000 in current liabilities, its current ratio is 2.0. That means it has 2 dollars of short-term assets for every 1 dollar of short-term debt.

Why it matters

Investors, lenders, and managers use the current ratio to gauge financial health and short-term solvency. The “good” range depends on the industry, since some businesses operate safely with lower ratios than others.

TL;DR: The current ratio measures whether a business can pay its short-term debts using its short-term assets.