7 Experts Weigh In On the Future of Accounting
Every industry is impacted by the rise of technology and automation, and for many, that can be an...
The current ratio is important for both judging how much debt a business has and how flexible they are with cashflow.
A company's current ratio is calculated by dividing its current assets by its current liabilities.
Where we see this ratio used is in assessing the company's ability to meet short-term obligations. It's important to note that a current ratio is just a small part of the picture of the financial health of the business and that more analysis is needed when problems are found.
A current ratio of under 1.0 means the company is less likely to be able to pay off its obligations by year-end. This indicates debts are greater than assets.
Despite the alarming sounding name, higher current ratios can actually be advantageous. The company is in a better financial position to pay off debt by year end and have more cash flow to reinvest. But current ratios of higher that 3.0 or 4.0 can suggest a company isn't making enough investments in current assets or managing its working capital.