What is Current Ratio?

The current ratio is a key financial metric that measures a company's ability to pay off its short-term liabilities with its current assets. This liquidity ratio is an important indicator of a company's financial health and operational efficiency.

Formula:

Current Ratio = Current Assets / Current Liabilities

Current Assets: Include cash, accounts receivable, inventory, and other assets expected to be converted to cash within one year.

Current Liabilities: Include accounts payable, short-term debt, and other obligations due within one year.

Current Ratio Calculator

Understanding Current Ratio Values

Rating	Ratio Range	Interpretation	Recommendations
Strong	> 2.0	Company has strong liquidity position	Consider investing excess cash or returning to shareholders
Good	1.5 - 2.0	Healthy working capital management	Maintain current practices while monitoring for improvements
Fair	1.0 - 1.5	Adequate but could improve	Review working capital management strategies
Poor	< 1.0	Potential liquidity issues	Immediate action needed to improve working capital

Real-World Examples & Industry Analysis

Technology Sector Example

Company: Tech Solutions Inc.

Current Assets: $10,000,000
Current Liabilities: $4,000,000
Current Ratio: 2.5
Industry Average: 2.1

This indicates strong liquidity, typical for tech companies with significant cash reserves and minimal inventory.

Retail Sector Example

Company: Retail Stores Corp

Current Assets: $8,000,000
Current Liabilities: $5,000,000
Current Ratio: 1.6
Industry Average: 1.5

Shows healthy liquidity while maintaining efficient inventory management, typical for retail operations.

Advanced Considerations

Limitations of Current Ratio

Does not consider timing of cash flows
May not reflect seasonal business variations
Industry-specific factors can affect interpretation
Quality of current assets not considered

Industry Comparisons

Industry	Typical Range	Key Considerations
Technology	2.0 - 4.0	High cash reserves, minimal inventory
Retail	1.5 - 2.0	Significant inventory levels
Manufacturing	1.2 - 1.8	High inventory and receivables
Services	1.0 - 1.5	Limited inventory needs

Trend Analysis

When analyzing current ratio trends, consider:

Historical company performance
Seasonal business cycles
Industry economic conditions
Company growth stage
Working capital management strategies