What Is Current Ratio?

The current ratio is a liquidity metric that measures your ability to pay short-term obligations with current assets. It compares all assets convertible to cash within one year against all debts due within one year. A current ratio above 1.5 generally indicates healthy liquidity; ratios between 1.0 and 1.5 suggest tighter but manageable conditions.

Lenders and investors use the current ratio to assess financial risk. A ratio below 1.0 signals potential difficulty meeting near-term obligations—a major red flag. However, an extremely high ratio (above 3.0) might suggest the business is holding too much idle cash that could be invested for growth.

The current ratio is easy to calculate from a balance sheet and provides a quick snapshot of financial health. However, it doesn't account for the quality of assets (inventory can't always be sold quickly) or seasonal variations in working capital.

Formula

Current Ratio = Current Assets ÷ Current Liabilities

Example

A retail business has current assets of €150,000 (cash €50,000, receivables €40,000, inventory €60,000) and current liabilities of €100,000 (payables €60,000, short-term loan €40,000). Current ratio = €150,000 ÷ €100,000 = 1.5. This ratio suggests the business can cover its short-term obligations 1.5 times over.

Finmap Integration

Finmap calculates your current ratio automatically and tracks it over time, helping you spot liquidity trends before cash flow becomes critical.