What does the current ratio measure?

The current ratio is a financial metric that specifically measures a company's liquidity, which is its ability to meet short-term obligations with its current assets. The current ratio is calculated by dividing current assets by current liabilities. A higher current ratio indicates that a company has a larger share of assets available to cover its short-term debts, making it a key indicator of financial health in terms of liquidity. While this ratio provides insight into the firm's short-term financial position, other metrics focus on profitability, asset efficiency, or leverage, thereby helping investors and stakeholders assess different aspects of a company's financial performance.