Current Ratio Calculator
Calculate your current ratio to assess liquidity and ability to meet short-term financial obligations.
Cash, inventory, receivables, etc. (assets convertible within 1 year)
Debts and obligations due within 1 year
What is the current ratio?
The current ratio measures a company's ability to pay short-term obligations with current assets. Formula: Current Assets / Current Liabilities. It shows whether you have enough assets convertible to cash within a year to cover debts due within a year. A ratio of 1.0+ indicates you can cover all short-term liabilities.
What is a good current ratio?
A current ratio between 1.5 and 3.0 is generally ideal. Below 1.0 suggests potential liquidity problems - you may struggle to pay obligations. Above 3.0 might indicate inefficient use of assets or excess inventory. The optimal ratio varies by industry: Retail 1.5-2.0, Manufacturing 1.2-2.0, Service companies 1.0-1.5.
What counts as current assets and liabilities?
Current Assets: Cash, marketable securities, accounts receivable, inventory, prepaid expenses - anything convertible to cash within 12 months. Current Liabilities: Accounts payable, short-term debt, accrued expenses, taxes payable, current portion of long-term debt - obligations due within 12 months. Both are found on the balance sheet.
What is the difference between current ratio and working capital?
Current ratio is a RATIO (division): Current Assets / Current Liabilities, expressed as a number (e.g., 2.0). Working capital is a DOLLAR AMOUNT (subtraction): Current Assets - Current Liabilities (e.g., $300,000). Both measure liquidity, but current ratio allows easier comparison between companies of different sizes, while working capital shows absolute dollar cushion.
How can I improve my current ratio?
Increase current ratio by: 1) Increasing current assets: Collect receivables faster, reduce inventory levels (convert to cash), delay major purchases. 2) Decreasing current liabilities: Pay off short-term debt, negotiate longer payment terms with suppliers, convert short-term debt to long-term. 3) Increase sales/revenue to boost cash and receivables. Focus on converting assets to cash quickly.
Can the current ratio be misleading?
Yes, limitations include: 1) Doesn't consider asset quality (slow-moving inventory or uncollectible receivables inflate ratio), 2) Snapshot in time - can fluctuate seasonally, 3) High ratio may indicate poor asset management (excess inventory/cash), 4) Doesn't show timing of cash flows. Use alongside quick ratio, cash flow analysis, and industry benchmarks for complete picture.