What current ratio indicates?

Answer 1

Current Ratio is when you take your current assets divided by your current liabilities. This is one of the best known and most widely used ratios. Because current assets and liabilities are, in principle, converted to cash over the following 12 months, the current ratio is a measure of short-term liquidity. The unit of measurement is either dollars or times. For example, you could say ABC Corp has $1.50 in current assets for every $1 in current liabilities, or you could say that ABC Corp has its current liabilities covered 1.5 times over. To a creditor, the higher the ratio the better. To the firm, a high current ratio indicates liquidity, but it also may indicate and inefficient use of cash and other short-term assets. Absent some extraordinary circumstances, we would expect to see a current ratio of at least 1, because a ratio of less than 1 would imply a negative working capital number, which which over time could mean insolvency. Generally, a number closer to the 2 range would be most desirable for most industries.