Current ratio

Current assets divided by current liabilities - a rough measure of whether a business can meet what falls due within the next year out of what it expects to turn into cash in the same period.

Example

Northgate's 1,635,000 of current assets over 600,000 of current liabilities is 2.73.

Important

A comfortable-looking ratio can lean almost entirely on stock and unpaid invoices. Always read it beside the quick ratio and look at the size of the gap.

Related terms

• Quick ratio — Current assets excluding inventory, divided by current liabilities. It describes the position if stock cannot be sold quickly.
• Inventory — Goods a business has bought or made and has not yet sold - raw materials, work in progress and finished stock.
• Accounts payable — Money the business owes suppliers for goods or services it has received and not yet paid for. Also called trade creditors.

Lessons that explain it

• The balance sheet: what it owns and what it owes — A photograph taken on one specific day, showing what the business has, who has a claim on it, and what is left over for the owners. It is the statement that tells you whether a bad year is survivable. (13 min)

All 578 terms in the Investing glossary