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Finance Glossary

Just call us Bond. Amortized bond.

Over 700 finance terms, Shmooped to perfection.

Current Ratio

Definition:

Current ratio is just a measure of what we got against what we owe, based on current (short-term) assets and liabilities (ones we only have to worry about for the next year).

We have to worry about two things here: the ratio itself and how big the numbers are.

If we have a really small business and our liabilities are larger than our assets, we might be scrambling to pay what we owe and we could get into a lot of trouble. If we're handling big moolah (assets of $10 million or more), we've got more pressure if we have lots of debt... even if we have more assets. If sales dip or a lot of our sales are on credit, we could have a hard time paying what we owe. 

Example 

Say current assets are $10,000,000 and current liabilities are $3,000,000. We like to see 3-1 or better for this ratio. It just means we’re paying our bills faster than we’re collecting them and it says a lot about our cash liquidity.