Current Ratio.
A definition, in plain English — with the books that teach it.
What it means
The current ratio measures a company's ability to pay its short-term obligations using its short-term assets. It is calculated by dividing current assets (cash, receivables, inventory) by current liabilities (accounts payable, accrued expenses, short-term debt due within a year). A ratio above 1.0 means current assets exceed current liabilities. Lenders and analysts use it to assess near-term liquidity. A very high ratio can indicate inefficient capital deployment; a ratio below 1.0 raises solvency concerns.
Example
A manufacturer has $4.2 million in current assets (cash, receivables, and inventory) and $2.8 million in current liabilities. Current ratio = $4.2M / $2.8M = 1.5. For every dollar of short-term debt, the company has $1.50 in short-term assets — a comfortable but not excessive buffer.
