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Current Ratio

Understanding the Current Ratio: A Key Indicator of Financial Health

The Current Ratio is a financial metric that measures a company's ability to pay off its short-term liabilities with its short-term assets. It indicates the liquidity and financial health of a company by comparing current assets to current liabilities. A higher ratio suggests that the company is more capable of covering its short-term debts.

Current Ratio = Current Assets ​/ Current Liabilities


Suppose Company ABC has the following financial details:


  • Current Assets: $200,000

  • Current Liabilities: $100,000


To calculate the Current Ratio:


  1. Divide current assets by current liabilities: $200,000/$100,000=2.0

A Current Ratio of 2.0 means that Company ABC has $2 in current assets for every $1 of its current liabilities. This indicates a strong liquidity position, suggesting that the company can comfortably cover its short-term debts.

Liquidity Ratio

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