What is the current ratio a measure of?

The current ratio is a financial metric used to evaluate a company's ability to pay its short-term obligations, which includes liabilities due within one year. It is calculated by dividing current assets by current liabilities.

Current assets are assets that a company expects to convert into cash or use within one year, such as cash, inventory, and accounts receivable. Current liabilities, on the other hand, are obligations that are due within the same time frame, such as accounts payable and short-term loans.

When the current ratio is greater than one, it indicates that the company has more current assets than current liabilities, suggesting it is in a healthy position to cover its short-term debts. Conversely, a ratio less than one may signal potential liquidity issues, as it suggests that current liabilities exceed current assets.

Understanding the current ratio is crucial for stakeholders, including investors and creditors, as it provides insight into the short-term financial health of a business. This metric is distinct from the other options, each of which measures different aspects of financial performance and does not specifically address the relationship between current assets and current liabilities.