The current ratio measures whether or not a firm has enough liquid resources to pay its debts over the next 12 months. It is defined as the ratio of Total Current Assets divided by Total Current Liabilities for the same period.
NOTE: This item is Not Available (NA) for Banks, Insurance companies and other companies that do not distinguish between current and long term assets and liabilities.
Acceptable current ratios vary from industry to industry. Low values (i.e. less than 1) may indicate that a firm may have difficulty meeting current obligations. However, this is not necessarily critical. Some types of businesses (e.g. McDonalds) typically operate with a current ratio less than one, because inventory turns over much more rapidly than the accounts payable become due. Alternatively, if an organisation has good long-term prospects, it may be able to borrow against those prospects to meet current obligations.
Many investors look for a current ratio greater than 2. A very high current ratio may indicate an inability to reduce inventory.