Current ratio.

In plain English

The current ratio compares everything expected to turn into cash within a year against everything owed within that same year. A ratio above 1 means short-term resources exceed short-term obligations on paper. What counts as healthy depends on the industry, since a grocer with fast inventory turns and almost no receivables runs comfortably at levels that would alarm a manufacturer. The weakness is that inventory and prepaid items sit in the numerator even though neither one pays a bill directly. The quick ratio strips those out for a stricter read.

01Why it matters

It is the first number a lender looks at to judge whether a business can survive the next twelve months without new financing.

02The math, step by step

Say current assets are 900,000 dollars (300,000 dollars cash, 250,000 dollars receivables, 350,000 dollars inventory) and current liabilities are 600,000 dollars. The current ratio is 1.5 (900,000 divided by 600,000). Strip out inventory and the picture changes considerably.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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