The current ratio compares all of a company’s current assets with its current liabilities.
They are usually defined as assets that are cash or will be converted to cash within a year or less, and liabilities that will be paid within a year or less.
The current ratio helps investors to better understand the company’s ability to cover its short-term debt with its current assets and make comparative comparisons with competitors and peers.
One of the shortcomings of the current liquidity ratio is the difficulty of comparing the indicator across industry groups.
Others include overgeneralization of specific balance sheets and lack of information on trends.