Current Ratio
Current assets divided by current liabilities — a quick test of short-term debt coverage.
The current ratio is one of the most basic liquidity measures: Current Assets / Current Liabilities. A ratio above 1.0 means the company has more current assets than current liabilities; below 1.0 means it may struggle to meet short-term obligations.
A "healthy" current ratio depends on the industry and business model. Manufacturing companies with large inventory typically have ratios of 1.5-2.5. SaaS companies with minimal inventory may operate comfortably at 1.0-1.5. Ratios above 3.0 may indicate inefficient use of capital.
The current ratio has limitations: it treats all current assets equally, even though inventory may take months to convert to cash while receivables may collect within weeks. The quick ratio (excluding inventory) provides a more conservative liquidity view.
Banks and lenders commonly include minimum current ratio requirements (covenants) in loan agreements, making it a metric that directly affects a company's borrowing capacity.
Related Terms
Current assets minus current liabilities — a measure of short-term liquidity and operational efficiency.
A snapshot of a company's assets, liabilities, and equity at a specific point in time.
Total debt divided by total equity — a measure of financial leverage and risk.
Further Reading
A founder and CFO guide to financial due diligence — what sophisticated investors examine, common red flags, and how to prepare your business.
A practical guide to the financial KPIs that give CFOs real-time visibility into business health across global operations.