What Is Current Ratio?
What is current ratio? The current ratio is a liquidity ratio that compares a company's current assets to its current liabilities. It answers: Can the company pay off its short-term obligations (due within a year) with its short-term assets (convertible to cash within a year)?
The current ratio is one of the most widely used liquidity metrics. Investors and creditors use it to assess whether a company has enough cushion to meet bills, pay down short-term debt, and weather temporary cash shortfalls. A ratio above 1.0 generally indicates the company can cover current liabilities.
Current Ratio Formula
The current ratio formula is:
Current Ratio = Current Assets ÷ Current Liabilities
Current assets: cash, cash equivalents, receivables, inventory, prepaid expenses, and other assets expected to convert to cash within 12 months. Current liabilities: payables, short-term debt, accrued expenses, and other obligations due within 12 months.
Example: Current assets $600 million, current liabilities $300 million → Current ratio = $600M ÷ $300M = 2.0. The company has $2 of current assets for every $1 of current liabilities.
How to Calculate Current Ratio
How to calculate current ratio: Open the balance sheet. Find "Total Current Assets" and "Total Current Liabilities." Divide current assets by current liabilities. Both figures are standard line items on the balance sheet.
Where to find the numbers
Current assets typically include: Cash and equivalents, Accounts receivable, Inventory, Prepaid expenses, Other current assets. Current liabilities include: Accounts payable, Short-term debt, Accrued expenses, Current portion of long-term debt, Other current liabilities. Use the most recent quarterly or annual balance sheet.
What Is a Good Current Ratio?
What is a good current ratio? It depends on the industry and business model. General guidelines:
- Above 1.0: The company can theoretically cover current liabilities. Minimum threshold for basic liquidity.
- 1.5–2.0: Often considered healthy—room for unforeseen expenses or delays in collections.
- Below 1.0: Current liabilities exceed current assets—liquidity risk. May need to sell assets, borrow, or raise equity.
- Very high (e.g., 3+): May indicate excess cash or inventory. Could mean capital is not being deployed efficiently.
Compare to sector peers. Retailers often operate with lower current ratios due to fast inventory turnover. Capital-intensive industries may hold more working capital. A "good" ratio is one that matches or exceeds industry norms with comfortable cushion.
Quick Ratio vs Current Ratio
Quick ratio vs current ratio: Both measure short-term liquidity. The key difference is what counts as "liquid."
The current ratio includes all current assets, including inventory and prepaid expenses. The quick ratio (acid-test ratio) excludes inventory and sometimes prepaid expenses—it uses only cash, cash equivalents, and receivables. Quick ratio = (Current Assets − Inventory) ÷ Current Liabilities.
Use the quick ratio when inventory may be slow to sell or hard to convert to cash quickly. For companies with fast-moving inventory (e.g., retail), the current ratio may be sufficient. For those with specialized or slow inventory, the quick ratio gives a more conservative view. The quick ratio is always less than or equal to the current ratio.
Limitations of the Current Ratio
The current ratio uses balance-sheet snapshots; it doesn't show the timing of cash flows. A company might have a good ratio but large bills due before receivables are collected. Inventory may be overstated or hard to sell. Compare trends over time and use other liquidity metrics (quick ratio, cash ratio, operating cash flow) for a fuller picture.
Current Ratio Example
Company A: Current assets $400M, current liabilities $200M → Current ratio = 2.0. Company B: Current assets $150M, current liabilities $180M → Current ratio = 0.83. Company A has strong liquidity. Company B cannot cover current liabilities with current assets alone—a liquidity concern. Investigate whether Company B has reliable access to credit or can accelerate collections.
Frequently Asked Questions
What is current ratio?
The current ratio measures a company's ability to pay its short-term obligations with its short-term assets. Current ratio = Current Assets ÷ Current Liabilities. A ratio above 1.0 means the company has more current assets than current liabilities. It is a key liquidity metric used by investors and creditors.
What is the current ratio formula?
The current ratio formula is: Current Ratio = Current Assets ÷ Current Liabilities. Current assets include cash, receivables, inventory, and other assets expected to convert to cash within a year. Current liabilities include payables, short-term debt, and obligations due within a year. Both figures come from the balance sheet.
How do you calculate current ratio?
Get current assets and current liabilities from the balance sheet. Divide current assets by current liabilities. Example: Current assets $500M, current liabilities $250M → Current ratio = 2.0. A ratio of 2.0 means the company has $2 of liquid assets for every $1 of short-term debt. Use the most recent balance sheet figures.
What is a good current ratio?
A good current ratio depends on the industry. Generally, a ratio above 1.0 means the company can cover its short-term obligations. A ratio of 1.5–2.0 is often seen as healthy. Too high (e.g., above 3) may indicate excess idle cash or inventory. Too low (below 1) suggests liquidity risk. Compare to sector peers—retailers often have lower ratios than utilities.
What is quick ratio vs current ratio?
Quick ratio vs current ratio: Both measure liquidity. The current ratio includes all current assets (cash, receivables, inventory). The quick ratio excludes inventory and sometimes prepaid expenses—it uses only the most liquid assets. Quick ratio = (Current Assets − Inventory) ÷ Current Liabilities. The quick ratio is more conservative; use it when inventory may be hard to sell quickly.