What does the current ratio measure?

The current ratio is a financial metric that specifically assesses a company's ability to meet its short-term obligations with its short-term assets. This ratio is calculated by dividing current assets by current liabilities, providing insight into the liquidity of a company. A higher current ratio indicates a stronger ability to cover short-term debts, which can instill confidence in creditors and investors regarding the company's financial health.

By focusing on the relationship between current assets—such as cash, accounts receivable, and inventory—and current liabilities, which include obligations like accounts payable and short-term loans, the current ratio serves as a crucial indicator of operational efficiency and short-term financial stability. Understanding this measure helps in analyzing how well the company can manage its immediate financial responsibilities without relying on long-term financing.