Current Ratio

What is Current Ratio?

Current Ratio compares current assets (cash, receivables, inventory) to current liabilities (payables, short-term debt). It answers: can you pay your bills coming due in the next 12 months?

Why Current Ratio Matters

Lenders and investors use current ratio as a quick health check. A ratio below 1.0 means you have more short-term obligations than liquid assets to cover them, a warning sign of potential cash problems.

For SaaS founders, current ratio typically looks strong because you have deferred revenue on the liability side but few inventory or receivable concerns. For ecommerce founders with significant inventory, the ratio can be misleading since slow-moving inventory inflates current assets.

Interpreting the Ratio

Generally, 1.5 to 2.0 is considered healthy. Below 1.0 signals potential liquidity problems. Above 3.0 might indicate inefficient use of working capital.

Your SaaS company has:

• Current Assets: $500,000 (cash $300K, receivables $200K)
• Current Liabilities: $250,000 (payables $100K, deferred revenue $150K)

Current Ratio = $500,000 ÷ $250,000 = 2.0

You have $2 in current assets for every $1 in short-term obligations. That is a healthy liquidity position.