Current Ratio Calculator
What Is the Current Ratio?
The current ratio measures whether a business has enough short-term assets to cover its short-term obligations. It is one of the most widely used liquidity metrics in business and one of the first numbers lenders and investors check when evaluating financial health.
A current ratio above 1.0 means the business has more current assets than current liabilities. Below 1.0 means the opposite — the business owes more in the short term than it can readily convert to cash. That is a warning sign regardless of how profitable the business appears on paper.
The Formula
Current Ratio = Current Assets / Current Liabilities
Definitions
Current assets are assets expected to convert to cash within the next 12 months. This typically includes cash, accounts receivable, inventory, and prepaid expenses.
Current liabilities are obligations due within the next 12 months. This includes accounts payable, accrued expenses, short-term loans, and the current portion of any long-term debt.
A Worked Example
A regional distribution company has the following balance sheet items:
Current assets:
Cash: $95,000
Accounts receivable: $310,000
Inventory: $185,000
Prepaid expenses: $20,000
Total current assets: $610,000
Current liabilities:
Accounts payable: $175,000
Accrued expenses: $65,000
Short-term loans: $80,000
Current portion of long-term debt: $45,000
Total current liabilities: $365,000
Current Ratio = $610,000 / $365,000 = 1.67
This company has $1.67 in current assets for every $1.00 of current obligations.
What Is a Good Current Ratio?
A ratio between 1.5 and 2.0 is generally considered healthy for most businesses. Below 1.2 starts to draw scrutiny from lenders. Above 3.0 may indicate the business is holding too much idle cash or inventory rather than deploying assets productively. Industry norms vary, so compare your ratio to peers in your specific sector.
Current Ratio vs. Quick Ratio
The current ratio includes inventory in current assets. For businesses that carry significant inventory, this can overstate liquidity since inventory is not always easy to convert to cash quickly. The quick ratio removes inventory from the calculation for a more conservative view of short-term liquidity. If your business carries substantial inventory, track both ratios.