Current ratio is a measure of short-term liquidity of a company and its ability to meet its debt obligations. The higher the current ratio, the more liquid the company is. However, having too high a current ratio (ie. in excess of 2) may indicate poor management of working capital. Ideally, the current ratio should be at least 1. Anything lower would be indicative of liquidity issues.
Current Ratio = Current Assets ÷ Current Liabilities
It is important to note that a company’s current ratio can vary greatly between different sectors. Hence, the ratio should only be compared between different companies in the same sector. The current ratio is also known as the working capital ratio