What Is the Current Ratio?
Formula, how to interpret it, and a worked example.
Home › Accounting Glossary › Current Ratio
| Type | Liquidity ratio |
|---|---|
| Stronger test | Quick (acid-test) ratio, which excludes inventory |
| Topic | Financial accounting · Ratio analysis |
Current ratio in plain English
A ratio above 1 means current assets are bigger than current liabilities. A ratio below 1 means the business may struggle to pay what it owes in the next year. What counts as “good” depends on the industry, so compare with similar businesses.
Worked example
Current assets are 60,000 and current liabilities are 40,000.
Current ratio = 60,000 ÷ 40,000 = 1.5. The business has 1.50 of current assets for every 1.00 of current liabilities.
Try your own numbers in the Current Ratio Calculator.
- Ignoring how quickly inventory can be sold. A business can have a healthy ratio and still struggle to find cash.
- Comparing ratios across very different industries.
Frequently asked questions
What is a good current ratio?
It depends on the industry. A ratio comfortably above 1 is generally seen as healthier, but compare with similar businesses.
What is the difference between the current ratio and the quick ratio?
The quick ratio leaves out inventory, so it is a stricter test of short-term liquidity.
Can a current ratio be too high?
Yes. A very high ratio can mean cash or inventory is sitting idle instead of being put to productive use.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.