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CHAPTER 7 Stock Research Checklist—Debt > What Is the Company’s Current Ratio?

What Is the Company’s Current Ratio?

Current ratio helps you to find out whether or not a company has the ability to pay current obligations.

The formula for current ratio is

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Current assets consist of cash and cash equivalents, receivables, inventory, and other current assets.

Current liabilities consist of accounts payable, short-term debt, and other liabilities.

If the ratio is below 1, that is a bad sign. This means that the company does not have enough current assets to meet the current obligations. Investors need to dig deeper with these kinds of companies. If the ratio is more than 2, this means that the company is in excellent condition and can meet the short-term obligations easily. Investors need to focus more on businesses that have a current ratio of more than 1.


  

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