current ratio

Discipline: Economics

Current Ratio is an indicator of liquidity. It predicts the ability of a firm to pay its current debts.

Current ratio equals to: Current Assets / Current Liabilities. Financial analysts usually expect this ratio to be above 2, but the current ratio of the firm also has to be compared to that of the other firms in the same industry.

The higher the current ratio, the better it is for the financial health of the firm, since relatively higher current assets (or relatively lower current liabilities) imply lower levels of risk.

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