How this calculator works
The current ratio divides everything the business expects to turn into cash within a year by everything it must pay within a year. Current assets include cash, receivables, inventory and prepaid expenses. Current liabilities include payables, short-term borrowings, the current portion of long-term debt and accrued expenses. A ratio of 1 means the two sides match exactly. Below 1 the business may struggle to meet its obligations from current assets alone. A very high ratio can mean cash is idle or inventory is piling up, so read the ratio together with the activity ratios.
Formula
Current ratio = current assets / current liabilities. Current assets = current ratio × current liabilities. Current liabilities = current assets / current ratio.
Worked example
Current assets of $500,000 and current liabilities of $250,000 give a current ratio of 2.0. If the business carried $750,000 of current assets, the ratio would be 3.0.
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Frequently asked questions
What is a good current ratio?
It depends on the industry. A grocery retailer with fast inventory turnover can run below 1, while a manufacturer with slow inventory may need 2 or more. Compare the ratio with peers and with the business's own history rather than against a universal target.
How does the current ratio differ from the quick ratio?
The quick ratio removes inventory and prepaid expenses from current assets, leaving the assets that convert to cash fastest. It is a stricter test of liquidity and is more useful when inventory is slow moving.
Can a company improve its current ratio quickly?
Yes, sometimes without changing real liquidity. Collecting receivables, selling inventory or delaying payables all raise it. Using cash to pay a current liability also raises the ratio when it is above 1, because both sides fall by the same amount.