What is the current ratio?
The current ratio (or working capital ratio) is one of the most widely used tests of short-term financial health. It answers a simple question: does the business have enough short-term resources to cover its short-term obligations?
Formula
Current ratio = Current assets ÷ Current liabilities
Example
A business has $150,000 of current assets (cash, receivables, inventory) and $100,000 of current liabilities (payables, short-term loans, accrued expenses). Current ratio = 1.5. It has $1.50 of current assets for every $1 due.
How to interpret it
- Below 1: current liabilities exceed current assets, a possible liquidity risk.
- 1.2 to 2: commonly seen as healthy, though norms vary by industry.
- Well above 2: may mean idle cash or too much inventory.
Supermarkets often run below 1 because they sell stock for cash before paying suppliers, so compare against peers.
Current ratio vs quick ratio
The [quick ratio](/glossary/quick-ratio) excludes inventory and prepaid expenses, giving a stricter view of liquidity.
How to improve it
- Collect receivables faster.
- Refinance short-term debt into long-term debt.
- Reduce excess inventory.
- Retain more profit in the business.