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Current Ratio

In short

Can the company pay its bills due within a year?

If you have $200 in the bank and $100 in bills due this month, your current ratio is 2.0. Above 1 means the company can pay its near-term debts.

Current ratio divides current assets by current liabilities. It measures short-term liquidity. Too low (<1) signals potential cash crunch. Too high (>3) may mean the company isn't investing its cash efficiently.

Formula

Current Ratio = Current Assets ÷ Current Liabilities

Thresholds

<1
May struggle to pay short-term debts
1-1.5
Adequate but tight
1.5-3
Healthy liquidity
>3
Excess cash — could invest more

Related concepts

  • Quick Ratio — Same as current ratio but removes inventory (stuff you haven't sold yet) from the assets side. If a company has $150 in cash and receivables, $50 in inventory, and $100 in current liabilities, its current ratio is 2.0 but its quick ratio is only 1.5 — a stricter test because inventory can be slow or hard to sell in a crisis.
  • Debt-to-Equity Ratio — If a company has $50 in debt and $100 in shareholder equity, D/E is 0.5. Higher means more leveraged — good in boom times, dangerous in downturns.
  • FCF Margin — If a business earns $100 in sales and has $15 left after paying all its bills and investing in the equipment needed to keep running, its FCF margin is 15%. Cash is what actually funds dividends, buybacks, and debt paydown — accounting profit alone doesn't.