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Current Ratio

What is Current Ratio?

Current ratio is a metric that makes it easier for businesses to understand their ability to deal with short-term liabilities. Use the following formula to calculate current ratio:

Current ratio = current assets/current liabilities

In this formula, “current assets” should include accounts receivable, and “current liabilities” should include both accrued expenses and accounts payable. 

If your company has a current ratio between 1.5 and 2.5, it should have good liquidity. For example, a current ratio of 1.5 means your business has $1.50 for every dollar in current liabilities.

Related terms

Budgeting and Planning
Budgeting and planning is the process of setting financial goals, creating a detailed plan to achieve those goals, and allocating resources to various activities and initiatives within an organization.
Business Intelligence
Business intelligence (BI) refers to the use of technology, tools, processes, and methodologies to analyze and transform raw data into actionable insights for making informed business decisions.
Cash Conversion Cycle
The cash conversion cycle (CCC) measures the rate at which your business converts its investments and inventory into cash.
Cash Flow Coverage Ratio
A company’s cash flow coverage ratio (CFCR) clarifies its ability to pay its debts based on cash flow from operations.
Cash Flow Optimization
This strategy focuses on maximizing the inflow of cash while efficiently managing outflows to maintain a healthy liquidity position.
Cash Flow from Financing Activities
Cash flow from financing activities (CFF) is a metric that can help investors understand a company’s net cash flows and overall financial strength. This number considers a business’s debts, equities and dividends, and is typically listed as a section in a company’s cash flow statement.