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What is the Current Ratio/Liquidity Ratio?

The current ratio is a measure of a company’s immediate liquidity, calculated by dividing current assets by current liabilities.

The value of this ratio lies in determining whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are sufficient enough to pay-off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). Generally speaking, the higher the current ratio, the better.

It means a company is flush with cash and is also positioned better to weather an unexpected shock.

Keywords: liquidity, taxes, current liabilities, current assets, cash equivalents, current ratio, liquidity ratio,