What Is the Current Ratio?
The current ratio compares what a company owns that turns into cash within a year with what it must pay within a year. It answers one question: can it pay its near-term bills?
How to calculate it
Current assets÷Current liabilities=Current ratio
A company has $3 million of current assets and $2 million of bills due this year. Its current ratio is 1.5.
What is a good current ratio?
Above 1 means it has more short-term assets than short-term bills. Many investors like 1.2 to 2. Too high can mean cash sitting idle. Below 1 can be a warning, though some strong retailers run below 1 on purpose.
Current ratio vs quick ratio
The quick ratio is stricter. It leaves out inventory, because goods on shelves may be hard to sell fast. It is a better test for companies with lots of stock.
See it in real companies
Open a company to see what it sells and how it makes money.
Related terms
Working capitalShort-term money a company has to run day to day.
Assets and liabilitiesWhat a company owns versus what it owes.
Balance sheetShows what a company owns and owes.
Debt-to-equityHow much debt compared with owners' money.
DebtMoney a company has borrowed and must pay back.
LiquidityHow easily you can buy or sell without moving the price.