current ratio

A financial ratio which shows how easily the company could pay its bills if all its creditors demanded payment at once. Calculated as: (current assets) divided by (current liabilities)

In theory this figure should be at least 1, because if it's lower than 1 it means that the company does not have the liquidity to pay all its creditors straight away. That said, some companies, notably supermarkets, happily survive on current ratios of less than 0.5.

As always, it's best to compare the ratio of one company with others in its sector. Over 1.5 suggests excessive caution on the part of management.

For a more stringent version of the current ratio, see 'acid test'.