Current ratio, also called the working capital ratio, is a liquidity ratio that measures how well a company meets its short-term obligations. It compares a company's current assets and current liabilities to determine the overall financial health. The formula for calculating the current ratio is as follows:
Current Ratio = Current Assets / Current Liabilities
While companies often want to avoid a low current ratio, a very high current ratio can also indicate that the company is not investing its available cash efficiently to grow their business.