current ratio

Definition

Current assets divided by current liabilities, measuring whether you can pay short-term bills with short-term assets. A ratio above 1.0 suggests solvency; below suggests you should probably start returning the recruiters' calls.

Example Usage

The current ratio of 0.6 indicated the company was technically insolvent, but management preferred the term 'aggressively capitalized.'

Origin

One of the oldest financial ratios, used in credit analysis since the late 19th century.

Fun Fact

Too high a current ratio isn't good either—it suggests you're hoarding cash instead of investing in growth, which is how you end up disrupted by startups.

Source: Financial ratio analysis

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