Current Ratio
Ratio of current assets to current liabilities, measuring short-term liquidity
What is Current Ratio?
Current ratio compares a business's current assets with its current liabilities. It shows whether the business can pay its short-term obligations from the assets it expects to turn into cash within a year.
It is one of the most widely used measures of short-term financial health and is closely watched by lenders and suppliers.
How this KPI is measured
- Function
- Finance
- Sub-function
- Cash Flow Management
- Industry
- All Industries
- Type
- Lagging
- Impact
- Risk
- Unit
- x
- Measurement frequency
- Monthly / Quarterly
- Formula
- Current assets / Current liabilities
How to calculate it
Divide current assets by current liabilities.
For example, if current assets are 3,000,000 and current liabilities are 2,000,000, the current ratio is 1.5.
A ratio above 1 means current assets cover current liabilities. What counts as healthy varies by industry, and a very high ratio can mean cash or stock is not being used well.
Where it is used
Assessing liquidity
Check ability to meet short-term bills.
Supporting lending decisions
Lenders often set covenants on it.
Monitoring trends
Spot a weakening position.
How to improve it
Tips and common mistakes
- Quality of current assets matters. Slow-moving stock is not cash.
- Compare with similar businesses.
- Use with the quick ratio.
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