Current ratio

The current ratio is an indication of a firm's accounting liquidity.

[1] Generally, high current ratio are regarded as better than low current ratios, as an indication of whether a company can pay a creditor back.

[2] A current ratio of less than 1 indicates that the company may have problems meeting its short-term obligations.

[3] However, if inventory turns into cash much more rapidly than the accounts payable become due, then the firm's current ratio can comfortably remain less than one.

[4] Low current ratios can also be justified for businesses that can collect cash from customers long before they need to pay their suppliers.