What is the current ratio (liquidity)?
The current ratio checks whether a company can cover its short-term bills with its short-term assets. A quick test of near-term financial health.
The current ratio is a liquidity measure: it compares a company’s current assets (cash, receivables, inventory — things expected to turn into cash within a year) against its current liabilities (bills due within a year). It answers a simple survival question: can the company pay what it owes in the short term?
A current ratio above 1 means current assets exceed current liabilities — generally reassuring. Below 1 can signal short-term cash strain, where the company may struggle to meet near-term obligations without raising money or selling assets. Many investors like to see a comfortable cushion, often around 1.5–2 for typical businesses.
Context matters, as always. Some efficient businesses (like fast-moving retailers) run lower ratios safely because cash cycles quickly; others need more buffer. And a very high ratio isn’t automatically great — it can mean idle cash or piled-up inventory. Read it with the cash flow and the industry norm.
Formula
Current ratio = Current assets ÷ Current liabilities
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Common questions
What is a good current ratio?
Broadly, above 1 is reassuring and many investors like roughly 1.5–2, but it varies by industry. Efficient retailers can run lower safely; a very high ratio may signal idle cash or excess inventory.
What is the difference between current ratio and quick ratio?
The quick ratio is stricter — it excludes inventory (which can be hard to sell fast) from current assets, giving a more conservative view of immediate liquidity.