Current Ratio Calculator
Calculate a company's ability to pay short-term obligations
Current Ratio Formula
Understanding the Current Ratio
The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations due within one year. It compares current assets (cash, receivables, inventory) to current liabilities (payables, short-term debt, accrued expenses).
A current ratio above 1.0 indicates the company has more current assets than liabilities, suggesting it can cover its short-term debts. However, the 'ideal' ratio varies by industry—retail may operate fine at 1.2, while manufacturing might need 2.0+.
This ratio is widely used by creditors, investors, and analysts to assess financial health. It's a quick snapshot of liquidity but should be analyzed alongside other metrics for a complete picture.
Current Ratio Interpretation
Ratio > 2.0
Strong liquidity. May indicate underutilized assets or excess inventory.
Ratio 1.5 - 2.0
Healthy liquidity. Good balance between assets and liabilities.
Ratio 1.0 - 1.5
Adequate but tight. Monitor cash flow closely.
Ratio < 1.0
Liquidity concern. May struggle to meet short-term obligations.
Industry Benchmarks
| Industry | Typical Range | Notes | Considerations |
|---|---|---|---|
| Retail | 1.0 - 1.5 | Fast inventory turnover | Lower OK |
| Manufacturing | 1.5 - 2.5 | Longer cash cycle | Higher needed |
| Technology | 2.0 - 3.0+ | Low inventory | Cash-heavy |
| Utilities | 0.8 - 1.2 | Stable revenue | Regulated |
| Healthcare | 1.5 - 2.0 | Receivables heavy | Collection matters |
Tips for Using Current Ratio
Compare to Industry
Always compare to industry peers. A 1.5 ratio may be excellent in retail but weak in tech.
Track Trends
Monitor ratio over time. A declining trend may signal trouble before the ratio hits danger zones.
Look Deeper
High ratios from obsolete inventory or uncollectible receivables aren't truly liquid.
Use Quick Ratio Too
Quick ratio excludes inventory, giving a more conservative liquidity measure.
Frequently Asked Questions
What is a good current ratio?
Generally, 1.5 to 2.0 is considered healthy for most industries. However, the 'ideal' varies significantly by sector. Compare to industry averages and the company's historical trend rather than a universal benchmark.
Can the current ratio be too high?
Yes. A very high ratio (>3.0) may indicate the company isn't efficiently using assets—excess cash sitting idle, slow-moving inventory, or poor receivables management. It could signal missed investment opportunities.
What's the difference between current ratio and quick ratio?
Quick ratio (acid-test ratio) excludes inventory from current assets. It's more conservative because inventory can be hard to liquidate quickly. If a company has high inventory, its quick ratio will be much lower than its current ratio.
How do I improve my current ratio?
Increase current assets (collect receivables faster, hold more cash) or decrease current liabilities (pay down short-term debt, extend payment terms). Converting short-term debt to long-term also helps.
Pro Tips
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