Current ratio is a liquidity ratio that measures a company’s ability to pay its obligations within the year.
It is calculated by taking the current assets divided by the current liabilities. Both figures are found under the Balance Sheet of the financial statement of a company.
Current ratio is also known as “cash ratio” or “liquidity ratio”.
A ratio above one suggests that the company is capable of paying its short-term obligations. A ratio below one suggests that the company would be unable to pay off its obligations if they came due at that point. Too high a ratio is not necessarily good as it shows that the company is not utilizing its assets efficiently.
For example, in 2012, Singapore Exchange Limited (SGX: S68) had current assets of $1.5 billion and current liabilities of $874.2 million. The current ratio is thus, 1.73.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.