current ratio

A liquidity ratio for a firm that measures its current assets against its current liabilities. The current ratio indicates if the company can pay off its short-term liabilities in an emergency by liquidating its current assets. Current assets are found at the top of the balance sheet and include line items such as cash and cash equivalents, accounts receivable and inventory, among others. A low current ratio indicates that a firm may have a hard time paying their current liabilities in the short run and deserves further investigation. A high ratio indicates a high level of liquidity and less chance of a cash squeeze. A current ratio that is too high, however, may indicate that the company is carrying too much inventory.