What is the current ratio?

Key points

• The current ratio refers to the ratio of total current assets to total current liabilities. It is the most commonly used financial indicator to measure the solvency of an enterprise's short-term debt.

• Generally speaking, the higher the liquidity ratio, the higher the liquidity of the enterprise's assets, and the stronger its short-term solvency.

• The current ratio can be used to compare different enterprises in the same industry or with the historical data of the company, but it is generally not used for cross-industry comparisons.

Detailed explanation of the concept

Current ratio (current ratio) refers to the ratio of total current assets to total current liabilities. It is the most commonly used financial indicator to measure an enterprise's short-term debt solvency. The formula for the current ratio is:

Among them, current assets refer to assets that an enterprise can monetize or use within a business cycle of one year or more. It mainly includes monetary capital, short-term investments, notes receivable, accounts receivable, and inventory. Current liabilities, also known as short-term liabilities, refer to debts to be repaid within a business cycle of one year or more, including short-term loans, notes payable, accounts payable, advance accounts receivable, dividends payable, taxes payable, other temporary payables, pre-payment charges, and long-term loans maturing within one year.

Generally speaking, the higher the liquidity ratio, the stronger the liquidity of the enterprise's assets, and the stronger its short-term solvency; vice versa, the weaker it is. However, a large current ratio also indicates that current assets are used more, which will affect the turnover efficiency and profitability of working capital.

The current ratio can be used to compare different enterprises in the same industry or with the historical data of the company, but it is generally not used for cross-industry comparisons. Various industries have different liquidity requirements for assets due to their different nature of operations. For example, the liquid assets required by commercial retail enterprises are often higher than those required for manufacturing enterprises, because the former requires a larger investment in inventory.

Examples of liquidity ratios

Below is the balance sheet from Apple's annual report for the 2021 fiscal year ending September 25, 2021:

The annual report shows:

Apple's current assets at the end of fiscal year 2021 were US$134.836 billion;

Apple's current liabilities at the end of fiscal year 2021 were US$125.481 billion;

It can be obtained,