How to Calculate the Current Ratio
Short answer. Divide current assets by current liabilities. With $300,000 of current assets and $200,000 of current liabilities the current ratio is 1.5, meaning the company has $1.50 of short-term resources for every $1 due within a year.
The formula
Current ratio = Current assets / Current liabilities
Step by step
- Find current assets. Cash, receivables, inventory and other assets expected to turn into cash within a year.
- Find current liabilities. Payables, short-term debt, accrued expenses and the current part of long-term debt.
- Divide. Current assets divided by current liabilities.
- Interpret. Above 1 means short-term obligations are covered on paper; the right level depends on the industry.
Worked example
A retailer's balance sheet
- Current assets: cash 50,000 + receivables 80,000 + inventory 170,000 = $300,000.
- Current liabilities: payables 120,000 + short-term debt 80,000 = $200,000.
- Current ratio = 300,000 / 200,000 = 1.5. Excluding inventory: (50,000 + 80,000) / 200,000 = 0.65.
Common mistakes
- Counting slow-moving inventory as if it were cash.
- Treating a very high ratio as always good: it can mean idle cash or bloated inventory.
- Comparing across industries.
Frequently asked questions
What is a good current ratio?
Often between 1.2 and 2 for non-financial firms, but norms vary by industry.
What is the difference between current ratio and quick ratio?
The quick ratio leaves out inventory, so it is stricter.
Can the current ratio be below 1?
Yes. Some businesses with fast cash turnover, such as grocers, operate that way.
General education, not personal financial advice. Example figures are illustrative.