Question

What is current ratio and why is it used?

Answer 1

Current Ratio is a liquidity ratio that measures the ability of a company to pay its short term debts and obligations.

This Ratio is calculated by dividing current assets by current liabilities.

Ratio which is below one indicates that company has more current liabilities then its current assets which means company will not be in position to pay off its dues.

Why it used:

The current ratio is mainly used to give an idea of a company's ability to pay back its current liabilities with its current assets.

Current ratio can be used to make a rough estimate of a company’s financial health.

The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash.