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What Is the Current Ratio?
The current ratio measures a company's ability to pay short-term obligations using its short-term assets.
Current Ratio = Current Assets / Current Liabilities
Three Liquidity Ratios Explained
| Ratio | Formula | Target |
|---|---|---|
| Current Ratio | Current Assets ÷ Current Liabilities | 1.5–2.0× |
| Quick Ratio | (Current Assets − Inventory) ÷ Current Liabilities | ≥ 1.0× |
| Cash Ratio | Cash & Equivalents ÷ Current Liabilities | 0.1–0.5× |
The quick ratio (also called the acid-test ratio) is more conservative — it excludes inventory, which may take weeks or months to sell. The cash ratio is the most stringent, counting only cash on hand.
What Is Net Working Capital?
Net Working Capital = Current Assets − Current Liabilities. Positive NWC means the company can cover all short-term obligations and still have liquid assets remaining.