Definition of Current Ratio

The current ratio is defined as a ratio of current assets to current liabilities. It is a measure that is used to assess the liquidity position of a business. A current ratio of 1.5-2.0 is normally considered ideal. The current ratio of less than 1.0 show that the current assets are less than its current liabilities and the business does not have enough liquid resources to meet its current obligations.


Formula for Current Ratio:

Current Ratio = Current Assets / Current liabilities


There is another ratio known as the quick ratio or acid test ratio that is used to assess the immediate liquidity of the business. The acid test ratio excludes inventories and prepaid expenses from current assets as they are not readily convertible into cash.

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