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DEFINITION of 'Current Ratio'. The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations. To gauge this ability, the current ratio considers the total assets of a company (both liquid and illiquid) relative to that companyâs total liabilities. The formula for calculating a companyâs current ratio, then, is: Current Ratio = Current Assets / Current Liabilities. The current ratio is called âcurrentâ because, unlike some other liquidity ratios, it incorporates all current assets and liabilities. The current ratio is also known as the working capital ratio.
The current ratio is the first of three financial ratios that we will examine. As stated earlier, liquidity ratios measure a companyâs ability to pay off its short-term debt using assets that can be easily liquidated. In this case, the current ratio measures a companyâs current assets against its current liabilities. Generally, higher numbers are better, implying that the firm has a higher amount of current assets when compared to current liabilities and should easily be able to pay off its short-term debt.