The current ratio compares assets that are expected to be converted to cash within one year (current assets) with obligations due within the same period (current liabilities). It is calculated as current assets divided by current liabilities.
Analysts and lenders use the current ratio to gauge short-term financial health and liquidity. It is often compared over time for a single company and against industry peers to assess whether a company has enough near-term resources to meet upcoming obligations. Different industries have different typical ranges; a higher ratio can indicate stronger liquidity, while a very low ratio may signal stress in meeting near-term obligations. The ratio is most informative when considered alongside other metrics such as working capital, the quality of current assets, and cash flow statements.
The current ratio does not account for timing differences in cash flows within the period, nor does it distinguish between highly liquid assets (cash, marketable securities) and slower-moving assets (inventories, some receivables). Accounting methods and seasonal patterns can skew the ratio; industry norms vary, so comparisons should be contextual. A high current ratio may also indicate underutilized capital, while a low ratio alone does not prove insolvency.
For example, if a company has $1.2 million in current assets and $0.8 million in current liabilities, its current ratio is 1.5.
Current assets · Current liabilities · Quick ratio · Working capital · Liquidity · Operating cycle