Current Ratio / Working capital Ratio

Definition: Current ratio is a metric which determines the ability of the company to pay off its short term debts/obligations.

Formula: Current Ratio =   Current Assets

                                                  Current Liabilities

Implication: The current ratio gives a sense of efficiency of a company’s operating cycle or its ability to turn its product into cash. A ratio under 1 implies that the company would not be able to pay off its obligations if, it stands due at that point of time. Generally a ratio in between 2 to 2.5 is considered sufficient. An efficient ratio might vary from industry to industry.