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Current Ratio
A liquidity ratio comparing current assets to current liabilities, showing ability to pay short-term obligations.
Formula
Current Ratio = Current Assets / Current Liabilities
Current Assets = Cash + Receivables + Inventory + Prepaid Expenses
Current Liabilities = Payables + Short-term Debt + Accrued Expenses
Definition
What is Current Ratio?
Current ratio measures short-term liquidity by comparing assets that can be converted to cash within a year to debts due within a year. It shows whether you can cover near-term obligations.
Current Ratio Interpretation
A ratio above 1.0 means current assets exceed current liabilities. Most healthy businesses maintain 1.5-2.0. Below 1.0 signals potential liquidity problems. Too high (above 3.0) may indicate inefficient asset use.
Current Ratio Limitations
The ratio treats all current assets equally, but inventory may be hard to liquidate quickly. For a more conservative view, use the Quick Ratio.
Example
Balance sheet items:
- Cash: $100,000
- Accounts Receivable: $150,000
- Inventory: $75,000
- Accounts Payable: $80,000
- Short-term Debt: $50,000
- Accrued Expenses: $45,000
Current Assets = $325,000
Current Liabilities = $175,000
Current Ratio = $325K / $175K = 1.86
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