Current Ratio Formula (Liquidity)
The current ratio formula measures a company's ability to pay short-term debts.
Learn what the ratio means and how to interpret it.
The Formula
The current ratio measures a company's ability to pay its short-term obligations using its short-term assets. It is one of the most widely used liquidity ratios in financial analysis.
Variables
| Symbol | Meaning | Examples |
|---|---|---|
| Current Assets | Assets convertible to cash within 12 months | Cash, accounts receivable, inventory, prepaid expenses |
| Current Liabilities | Debts due within 12 months | Accounts payable, short-term loans, accrued expenses, current portion of long-term debt |
| Current Ratio | The resulting ratio | A number (e.g., 1.8 means $1.80 in assets per $1 owed) |
Example 1 — Healthy Company
A manufacturing company has $450,000 in current assets and $250,000 in current liabilities.
Current Ratio = $450,000 / $250,000
Current Ratio = 1.8 — for every $1 owed, the company has $1.80 available. This is healthy.
Example 2 — Cash-Strapped Company
A retail business has $80,000 in current assets and $120,000 in current liabilities.
Current Ratio = $80,000 / $120,000
Current Ratio = 0.67 — the company has less than $1 for every $1 it owes. This is a warning sign.
Interpreting the Current Ratio
- Below 1.0 — Current liabilities exceed current assets. The company may struggle to meet short-term obligations without additional financing.
- 1.0–1.5 — Adequate but tight. Manageable for companies with fast cash cycles (like grocery stores).
- 1.5–3.0 — Generally considered healthy. The company can comfortably cover its short-term debts.
- Above 3.0 — Potentially too high. The company may be holding excess idle cash or carrying too much unsold inventory.
Quick Ratio (Acid-Test)
The Quick Ratio is a stricter version that excludes inventory (which may be hard to convert to cash quickly):
The quick ratio is preferred when inventory is a large or illiquid part of current assets. A quick ratio above 1.0 is generally considered healthy.
When to Use It
- Evaluating whether a business can survive a short-term financial shock
- Comparing liquidity between competitors in the same industry
- Due diligence before investing in or lending to a company
- Monitoring a company's financial health over time via quarterly reports