ABSTRACT
This ratio indicates to what extent short-term assets are adequate to settle short-term liabilities. (‘Current’ in accounting implies turning assets into cash, or paying creditors, within twelve months from the balance sheet date.) Should the ratio be less than 1.0, current assets would not fully cover short-term creditors. This would be all right in a company with a strong daily cash flow, such as a retailer. But for a manufacturing company it would suggest looking closely at the acid test ratio (see below), because short-term financial problems might be developing.
