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Accounting encyclopedia · Financial statements

Current ratio

The current ratio is current assets divided by current liabilities, taken from the balance sheet. It shows how many dollars of near-term resources a business holds for each dollar of near-term obligations. A ratio above 1.0 means current assets exceed current liabilities, but the result says nothing about when cash will actually arrive.

Sora Accounting & Tax · General information · Editorial policy
Updated · 3 min read

Current assets weighed against current liabilities

An illustration of current assets set against current liabilities to form the current ratio, not your result.

Visual labels: Assets due within a year; Bills due within a year; Ratio.

The formula and what it tells you

Current ratio = current assets ÷ current liabilities. Current assets usually include cash, receivables and inventory. Current liabilities include supplier balances, a line of credit and the portion of long-term debt due within the next year. Both figures come from the balance sheet, so the ratio is only as reliable as that statement.

BDC describes the current ratio as a measure of a company’s ability to pay its short-term obligations. Its financial ratios article treats 1.0 or higher as generally acceptable, while its glossary says most businesses work to stay between about 1.7 and 2.0. The article adds that what is healthy varies by industry, so those figures are reference points, not pass marks.

An illustrative example

Suppose a small business has $10,000 in the bank, $30,000 owed by customers and $50,000 of inventory, for $90,000 of current assets. It owes $60,000 in current liabilities. Its current ratio is $90,000 ÷ $60,000, or 1.5. These numbers are illustrative only.

A ratio of 1.5 looks comfortable, yet more than half of those assets are inventory that must be sold first. If $15,000 of the receivables are also overdue, the assets that can pay bills this month are smaller than the ratio suggests. This is why the quick ratio is often read beside it.

Why a single ratio can mislead

A high ratio is not always good news. BDC notes that a higher result may mean capital is underused. A low ratio is not always a problem either. BDC gives the example of a clothing store whose goods turn over quickly and which could function with a ratio close to 1.0.

Timing can also distort the figure. Paying down a payable just before year end, or a large customer deposit recorded as a liability, can move the ratio without changing the real position. Compare the ratio over several periods prepared the same way, rather than relying on one date.

What to discuss with your accountant

Ask how your current assets and liabilities are classified, whether overdue receivables or slow-moving stock should be treated cautiously, and what a typical ratio looks like for your industry. If a lender or loan agreement sets a minimum ratio, ask exactly how it defines each part.

Bring your latest balance sheet, an aged receivables list and a schedule of loan payments due within twelve months. For a dated view of cash, pair the ratio with a cash-flow forecast. The current ratio and working capital calculator on this site can help you try the arithmetic.

Sources & editorial notes

Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.

Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.