Liquidity – Current Ratio

Liquidity is a measure of a company’s short-term ability to meet its financial obligations. There are several liquidity metrics, with the most common being the quick ratio. Another complementary metric is the current ratio, which is used for companies where inventory turns over quickly and is therefore included in the liquidity calculation.

Just like the quick ratio, the current ratio answers the question, “Can the company pay its bills?” The current ratio compares cash, accounts receivable, and inventory to short-term liabilities. Textbooks state that the current ratio of around 200% is considered good, and if it falls below 200%, it may be insufficient.