What is Current Ratio?
The Current Ratio measures short-term liquidity: whether a company has enough current assets (cash, receivables, inventory) to cover its current liabilities (payables, short-term debt) due within the next 12 months. A ratio above 1.0 means current assets exceed current liabilities; below 1.0 may indicate liquidity pressure. However, current ratio alone can be misleading: a company with a current ratio of 2.0 but most of its current assets tied up in slow-moving inventory may be less liquid than a company with a current ratio of 1.2 but mostly cash. For this reason, the Quick Ratio (which excludes inventory) is often preferred for assessing true short-term liquidity.
Formula
Current Ratio = Current Assets / Current Liabilities
Current Assets = cash + receivables + inventory + prepaid expenses + other (due within 12 months)
Current Liabilities = payables + accruals + short-term debt (due within 12 months)
Calculator
How to Use
- 1Find current assets: From the balance sheet: the "Current Assets" subtotal.
- 2Find current liabilities: The "Current Liabilities" subtotal from the balance sheet.
- 3Divide: A result of 1.5 means $1.50 in current assets per $1.00 of current obligations.
- 4Compare to quick ratio: If Current Ratio is high but Quick Ratio is much lower, inventory is inflated; investigate inventory quality.
Worked Example
Example: Retailer balance sheet
Current Assets
$850M
Current Liabilities
$600M
Current Ratio = 850/600 = 1.42×. Healthy buffer. If inventory is $400M of the $850M current assets, the Quick Ratio = (850-400)/600 = 0.75×, below 1.0, suggesting the retailer depends on selling inventory to meet near-term obligations. Not necessarily a problem for a retailer with fast inventory turnover, but worth monitoring.