What does the Current Ratio specifically compare?

The Current Ratio is a financial metric that specifically compares current assets to current liabilities. This ratio provides insights into a company's short-term liquidity position, reflecting its ability to meet its short-term obligations with its short-term assets.

Current assets include cash, accounts receivable, inventory, and other assets that are expected to be converted into cash or used within one year. Current liabilities include obligations that the company expects to settle within the same period. By dividing current assets by current liabilities, the Current Ratio helps assess whether the company has enough resources to cover its debts that are due soon.

A ratio greater than one typically indicates that the company has more current assets than current liabilities, suggesting good short-term financial health. Conversely, a ratio less than one may signal potential liquidity issues. This measure is particularly useful for stakeholders, such as investors and creditors, to evaluate the financial stability and operational efficiency of the business in the near term.