What is Current Ratio?

The Current Ratio is a liquidity ratio that measures a company's ability to pay its short-term obligations (those due within one year). It compares a company's current assets to its current liabilities, providing a snapshot of its short-term financial health.

For Startups: For a startup, a current ratio below 1 can be a warning sign, indicating that it may not have enough liquid assets to cover its immediate liabilities. Investors use this ratio to gauge a company's financial stability and risk of insolvency. A healthy ratio is typically considered to be between 1.5 and 2, but this varies by industry.

For SaaS: SaaS companies often have a lower current ratio due to high deferred revenue (a current liability), but this is not necessarily a negative sign due to their predictable recurring revenue.

Calculation: Current Ratio = Current Assets / Current Liabilities.

Example: A company with current assets of ₹1 Crore and current liabilities of ₹50 Lakhs has a current ratio of 2.0.