The current ratio compares current assets to current liabilities for enterprises. A higher current ratio indicates greater liquidity (more ability to meet short-term obligations) and a lower current ratio indicates a less nimble company.
The formula is:–
Current ratio = current assets / current liabilities
A current ratio of 1.0 would indicate that the book value of current assets is equal to the book value of current liabilities.
Current assets are assets which can be converted into cash or be utilised within 12 months, such as accounts receivable, inventories, and prepaid expenses.
Current liabilities are liabilities which are expected to be paid within 12 months such as accounts payable, outstanding bills and expenses.