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Current Ratio

The current ratio is the relationship between a company’s current assets and its current liabilities. Remember to calculate the current ratio of a company simply divide total assets by total liabilities. For example, if a company had current assets of $20,000 and current liabilities of $10,000, its current ratio would be 2.0—in other words, the company’s current ratio is two times its current liabilities. A high current ratio generally indicates a stronger position, because a higher ratio means a company is more capable of meeting its current obligations. However, a company might have a current ratio that is too high, meaning that it is invested too much in current assets compared to its needs. A company with a 2-to-1 ratio is generally thought to be a good risk.

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