Current Ratio
Short answer
Current ratio is current assets divided by current liabilities. It tells you whether a business can pay its bills over the next 12 months. A current ratio of 1.5× or higher is conventionally considered comfortable; below 1.0× means current liabilities exceed liquid assets.
Formula
Current Ratio = Current Assets / Current Liabilities
Add up cash, receivables, inventory, and other current assets. Divide by the sum of accounts payable, short-term debt, and other current liabilities.
Why it matters
A current ratio below 1.0× means your business technically can't cover its next 12 months of bills with its next 12 months of assets. Lenders and credit committees flag anything below 1.2× as a risk.
Benchmarks
People also ask
Common questions about Current Ratio
What is the current ratio?+
Current ratio = Current Assets ÷ Current Liabilities. It measures whether a business has enough liquid assets to cover obligations due within 12 months.
What is a good current ratio?+
1.5× to 2.0× is conventionally considered healthy. Below 1.0× signals potential liquidity stress. A persistently high ratio (e.g. above 2.5×) can indicate idle capital — too much cash or inventory sitting still.
How is current ratio different from quick ratio?+
Quick ratio excludes inventory from current assets, so it is a stricter test of immediate liquidity. Quick ratio = (Cash + AR + Marketable Securities) ÷ Current Liabilities.
Why does current ratio matter to lenders?+
Lenders use it as a covenant — many credit agreements require maintaining a current ratio above 1.25× or 1.5×. Falling below the threshold can trigger default, even if you are paying on time.
See your business's current ratio.
Paste your numbers and CFO Grade computes this — plus 23 other ratios — in seconds, with your industry's benchmark already loaded.