The current ratio divides current assets by current liabilities. It answers a single question: for every pound falling due within the year, how many pounds of short-term assets are available to meet it? A ratio of 1.0 means the two exactly balance, below 1.0 means liabilities exceed assets, and most lenders look for something between 1.2 and 2.0 depending on the sector.
Its weakness is that it treats every current asset as equally available, which they plainly are not. Cash is immediate, receivables need collecting, and inventory has to be sold first and may not sell at book value at all. That is why this page also reports the ratio with inventory stripped out — the quick ratio or acid test — and why the gap between the two matters more than either figure alone for a stock-heavy business.
A very high ratio is not automatically good news either. Three or four times cover often means cash sitting idle, receivables not being collected, or stock accumulating, all of which are capital that could be earning something. Read the ratio as a range to sit within rather than a number to maximise, and track your own trend rather than a published average.
The formula
Cash- Cash and equivalents available immediately
Receivables- Amounts owed by customers, due within the year
Inventory- Stock at cost — included here, excluded from the quick ratio
Current liabilities- Everything payable within twelve months
How to use this calculator
- Enter cash, receivables, inventory and any other current assets.
- Enter total current liabilities for the same balance sheet date.
- Read the current ratio on the gauge.
- Compare it with the inventory-free figure below to see how much depends on selling stock.
Worked examples
A balance sheet with heavy inventory
Cash $90,000, receivables $140,000, inventory $150,000 and $40,000 of other current assets total $420,000. Against $310,000 of current liabilities the current ratio is 1.35, which looks comfortable.
The same sheet without the stock
Removing inventory leaves $270,000 of quick assets and a ratio of 0.87. So 36% of the apparent cover depends on selling stock at book value. For a business with slow-moving lines that difference of 0.48 is the whole story.
How to read your score
Frequently asked questions
What is a good current ratio?
Most lenders want at least 1.2 and are comfortable between 1.5 and 2.0. Sector matters: supermarkets run below 1.0 quite deliberately, while contractors holding work in progress often need more than 2.0.
Why exclude inventory to get the quick ratio?
Because stock must be sold before it becomes cash, and in a stressed situation it rarely sells at book value. The quick ratio asks whether you could meet obligations without needing that sale.
Can the current ratio be too high?
Yes. Cover of three or four times usually means capital sitting unproductively in cash, receivables or stock. It is safe but expensive, and it drags on return on capital.
Does the current ratio show whether I can pay this month?
Not reliably. It is a snapshot of proportions, not of timing. A cash flow forecast by week is the right tool for that question; the current ratio is for structural comparison.
Current ratio reference
| Current assets | liabilities $200k | liabilities $260k | liabilities $310k | liabilities $400k | liabilities $520k |
|---|---|---|---|---|---|
| assets $250k | 1.25 | 0.96 | 0.81 | 0.62 | 0.48 |
| assets $350k | 1.75 | 1.35 | 1.13 | 0.88 | 0.67 |
| assets $420k | 2.10 | 1.62 | 1.35 | 1.05 | 0.81 |
| assets $500k | 2.50 | 1.92 | 1.61 | 1.25 | 0.96 |
| assets $650k | 3.25 | 2.50 | 2.10 | 1.62 | 1.25 |
Values below 1.00 mean current liabilities exceed current assets.
| Inventory share of current assets | Current ratio | Quick ratio | Cover lost by excluding stock |
|---|---|---|---|
| 10% | 1.35 | 1.22 | 0.14 |
| 20% | 1.35 | 1.08 | 0.27 |
| 30% | 1.35 | 0.95 | 0.41 |
| 40% | 1.35 | 0.81 | 0.54 |
| 50% | 1.35 | 0.68 | 0.68 |
| 65% | 1.35 | 0.47 | 0.88 |
Holding total current assets at $420,000 and current liabilities at $310,000, so only the composition changes.