Glossary
What is the current ratio?
The current ratio is current assets divided by current liabilities, read from the balance sheet. It is a rough test of whether the cash, debtors and stock a business holds would cover the bills due in the next twelve months. A ratio above 1 means current assets exceed current liabilities.
The right level varies by sector: a business that sells for cash and holds little stock can run on a lower ratio than one carrying inventory and long customer terms. It is a snapshot at the balance sheet date and says nothing about timing within the year.
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