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Current ratio

Current ratio

Description

Current ratio indicates companies’ ability to cover its’ short-term debts. All the data needed to calculate this ratio can be easily collected from the balance sheet. It is very important to notice that current ratio is the most general liquidity ratio, which doesn't show the quality of current assets.

Norms and limitations

A ratio of 1.2 to 2 is generally considered acceptable. From 2 to 3 – good.

However it is a must to consider company’s industry. Higher value indicates ineffective use of company’s asset. It is important to the owners of the company, as it indicates that there are some missteps in management activities. Whereas lower value shows that there might be some difficulties in covering obligations.

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