What is Current ratio?
Joriy likvidlik koeffitsienti
In short
Current assets ÷ current liabilities. Below 1, the company may struggle to meet the bills due within a year.
Also known as: quick ratio, liquidity ratio
The current ratio shows whether a company can cover the obligations due within a year with assets that turn into cash within a year.
Current ratio = Current assets ÷ Current liabilities
Current assets are cash, receivables and inventory. Current liabilities are amounts owed to suppliers, loans due within a year, accrued wages and so on. Both are on the balance sheet.
How to read it
- Below 1 — short-term obligations exceed current assets; the company may struggle with payments, borrow more or issue shares.
- Around 1–2 — normal for many industries.
- Very high — safe, but it can also mean excess cash or unsold inventory is being used inefficiently.
Stricter versions
Inventory cannot always be turned into cash quickly. So the quick ratio excludes inventory, and the cash ratio counts only cash.
Limitation
Some business models run comfortably below 1: for example large retail chains that sell goods quickly and pay suppliers later. So judge the number together with the industry and the trend.
Example
A hypothetical company ($ millions):
- Current assets: cash 60, receivables 120, inventory 120 → 300
- Current liabilities: 200
Calculation:
- Current ratio: 300 ÷ 200 = 1.5
- Quick ratio: (300 − 120) ÷ 200 = 0.9
- Cash ratio: 60 ÷ 200 = 0.3
At first glance 1.5 looks safe. But without inventory the ratio is below 1: if the inventory sells slowly, the company will have to collect receivables or borrow to pay its bills.
Mistakes and tips
Look at the current ratio together with the quick ratio — especially for companies with large inventories.
Track the direction over several quarters: a steady decline is a warning sign.
Don't conclude from this metric alone; check long-term debt through debt-to-equity.
Frequently asked questions
- What is a good current ratio?
- For many industries a range of 1 to 2 is considered normal. Below 1 deserves a closer look, but in some business models it is routine.
- What is the difference between the current ratio and the quick ratio?
- The current ratio counts all current assets. The quick ratio excludes inventory because it may be hard to turn into cash quickly.
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