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Current Ratio |
Also found in: Dictionary/thesaurus, Encyclopedia, Wikipedia, Hutchinson | 0.01 sec. |
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Current ratio Indicator of short-term debt-paying ability. Determined by dividing current assets by current liabilities. The higher the ratio, the more liquid the company.
Current Ratio ![]() What Does Current Ratio Mean? Also known as liquidity ratio, cash asset ratio, and cash ratio; a liquidity ratio that measures a company's ability to pay short-term obligations. It is calculated as follows: Investopedia explains Current Ratio The current ratio is used primarily to ascertain a company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the better the company's ability to pay its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. Although this may indicate that the company is not in good financial health, it does not necessarily mean that it will go bankrupt—there are many ways to access financing—but it is definitely not a good sign. The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble collecting their receivables or have long inventory turnover can run into liquidity problems. Since businesses differ by industry, it is best to use this ratio to compare companies within the same industry. This ratio is similar to the acid-test ratio except that the acidtest ratio does not consider inventory and prepaids as liquid assets. The components of the current ratio (current assets and current liabilities) can be used to derive working capital (difference between current assets and current liabilities). Working capital frequently is used to calculate the working capital ratio, which is working capital as a ratio of sales. Related Terms: How to thank TFD for its existence? Tell a friend about us, add a link to this page, add the site to iGoogle, or visit webmaster's page for free fun content. |
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| The hospital industry reacted favorably to the news that the current ratio will hold for three more years. The current ratio is one nurse to 347 patients, but chief nursing officer Sarah Mullally says the recommendation was based on a 1970's USA study and 'it is not clear how applicable that is to the NHS today'. A typical bank revolving loan covenant, for example, may set out the following requirements: a minimum amount of shareholders' equity, a maximum debt-to-equity ratio, and/or a minimum current ratio. |
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