Current ratio

- Step one in a financial analysis…is computing return on equity…and then the DuPont framework analysis…to look at the profitability,…efficiency, and leverage components.…We're now going to hone in on the leverage component…of return on equity with some specific ratios.…First we'll look at current ratio,…which is one of the top five ratios of all time.…Then the debt ratio, debt-to-equity ratio,…and then the times interest earned ratio.…Let's start with current ratio.…Current ratio is a measure of liquidity.…

Liquidity reflects the ability of a company…to pay its obligations in the short term.…Short term we typically define as less than one year.…Current ratio is computed as current assets…divided by current liabilities.…And let me remind you what a current asset is…and what a current liability is.…A current asset is an asset expected to be used…or turned into cash within one year.…So for example, accounts receivable.…That's a current asset because we expect those accounts…to be collected in cash within one year.…