Explanation of Current Ratio:

The current ratio compares all the Current Assets of a company to all the Current Liabilities.  What this ratio basically tells us is if the company had to sell all its readily available assets, would it be able to pay off its immediate debt? 

Importance of Current Assets:

At a minimum, you would hope the company whose financial performance you are analyzing could meet pay its Current Liabilities if it were to liquidate all its Current Assets.  This would translate to a Current Ratio of 1.0 - the point where the Current Assets equal the Current Liabilities.  As with all the other performance ratios, the Current Ratio value depends on the industry in which the company is operating.  It is also important to know what assets make up most of the Current Assets.  Inventory and Accounts Receivable, which are part of the Current Assets, cannot always be counted on as easily transferred to cash.  Cash and Marketable Securities comprising the majority of the Current Assets would definitely be favorable. Knowing this, would the company you are analyzing truly be able to meet its financial obligations is it in fact had to sell its Current Assets?  The Current Ratio rising over time will be favorable.

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