The current ratio is one of several liquidity ratios that are used to judge how well funded companies are for the short term. A company can earn tons of money, but if it cannot pay its bills, then it will get into trouble.
Current ratio lets the investor judge how well the company can cover its current obligations and how much would be left over. "Current" in this context refers to (usually) assets that can be converted to cash or obligations that must be paid in one year or less. So, within a year, how much of its current assets will be used to pay off the current liabilities.
If the ratio is low, then the company is potentially in trouble. It will have to quickly raise cash or other current assets in order to pay wages, utility bills, rent, or debt. If the ratio is less than one, the company is in serious trouble. As an investor, you should probably look elsewhere. If it is less than two, or at least 1.5, then the company could be headed into trouble. As an investor, it would probably be good to look elsewhere.
This is a good measure of how well management handles the flow of cash through the company.
Recent Mentions on Fool.com
- Select Comfort Is Not Just A Mattress Company
- Why and How I'm Buying the Downtrodden Gold Miners
- Intel and China Mobile Could Power This Chipmaker Higher
- Oil and Gas Companies Are Targeting the Asian LNG Market
- How to Turn Trash Into Cash: Investing in Waste Management Companies
- A Different Way to Invest in Gold