Current ratio
Current ratio is used to find out the company’s ability to pay off short term liabilities with their current assets. Can they pay off their lenders with the currents assets they own.
And this is the simple equation to find that out. You divide current assets by current liabilities.
If the value of the current ratio is less than one. Then that would mean the company does not have enough current assets to pay off its short term debt.
And when analyzing current ratio, it is also good to know the industry average, as even if a company’s current ratio is 2.1 but if the industry average is 4.3 then it is not on par with its competitors. Slightly lower than industry average is not the worst thing ever, but too much variance needs further investigation.
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