From the course: Financial Accounting Part 2

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Current ratio

Current ratio

From the course: Financial Accounting Part 2

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Current ratio

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- [Tutor] Step one in a financial analysis is computing return on equity, and then the DuPont framework analysis, looks at profitability, efficiency and leverage components. We're now going to be exposed to some additional powerful ratios. These ratios tell us a lot about a company by applying just a little effort. First, we'll look at current ratio which is one of the top five ratios of all time. Then the debt ratio, debt to equity ratio and then the price-earnings ratio. Let's start with the current ratio. Current ratio is a measure of liquidity. Liquidity reflects the ability of a company to pay its obligations in the short-term. By short-term, we're typically meaning less than one year. Current ratio is computed as current assets divided by current liabilities. Let me remind you what a current asset is and what a current liability is. A current asset is an asset expected to be used or turned into cash within one…

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