Current Ratio equals current assets divided by current liabilities.
The current ratio measures a company's ability to meet its short-term obligations such as paying its creditors, buying raw materials for production etc.. It also serves as an indication of a company's relative efficiency. It is calculated by dividing current assets by current liabilities.
A current ratio greater than 2.0 indicates a company's current assets - those that it can sell in the next 12 months - are twice as large as its short term liabilities. If current liabilities exceed current assets (for a current ratio less than 1) then the company may not be able to meet its short-term debt obligations.
Generally, the higher the ratio, the more liquid the company is. This means the company would have a better short-term financial standing to meet its debt obligations. However, an investor should also take note of a company's operating cash flow in order to get a better sense of its liquidity. A low current ratio is can often be supported by a strong operating cash flow.
On the other hand, if a company is able to operate with a low current ratio, it means that the company is more efficient about using its capital. Therefore, a low current ratio can lead to higher return of assets.