From the course: Running a Profitable Business: Understanding Financial Ratios
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Current ratio
From the course: Running a Profitable Business: Understanding Financial Ratios
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. 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. Inventory is a current asset because we expect that inventory to be…
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