Answer Posted / james. e
It is a liquidity ratio that measures a company's ability
to pay short-term obligations.
The Current Ratio formula is:
Current Ratio=current assets/current liabilities
Also known as "liquidity ratio", "cash asset ratio"
and "cash ratio".
The ratio is mainly used to give an idea of the 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 more
capable the company is of paying 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. While
this shows the company is not in good financial health, it
does not necessarily mean that it will go bankrupt - as
there are many ways to access financing - but it is
definitely not a good sign.
This ratio is similar to the acid-test ratio except that
the acid-test ratio does not include inventory and prepaids
as assets that can be liquidated.
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