Current Ratio = Current Assets / Short Term Liabilities
Current ratio shows the company's short-term solvency.
Current Assets are values in the company that can be sold or converted into value within a short period of time. Current Ratio finance the company's daily operations. This can be in the form of money in the bank, total stock, or customer receivables.
Short-Term Liabilities are liabilities that are normally payable within one year.
This can be in the form of tax liabilities, debts to employees, or loans.
The company must always hold funds to be able to handle Short-Term Liabilities.
Things to keep in mind
- A high value is positive.
- Balance Sheet Liquidity should be above 2 in order for the company to be able to quickly settle its Short-Term Liabilities.
- A low Balance Sheet Liquidity may mean that the company finds it difficult to pay off its debts.