Current ratio: formula, calculation and interpretation

Published Monday 23 February 2026

Table of contents

• What is the current ratio?
• What are current assets and current liabilities?
• How to calculate current ratio
• Current ratio calculation example
• How to interpret your current ratio
• Current ratio vs quick ratio and other liquidity ratios
• Current ratio in relation to working capital and cash flow
• What are the limitations of current ratio?
• Track your current ratio easily with Xero
• FAQs on current ratio

Key takeaways

• Calculate your current ratio monthly by dividing current assets by current liabilities to track your business's ability to pay short-term bills and spot potential cash flow issues early.
• Aim for a current ratio between 1.5 and 3.0 to maintain healthy liquidity, as ratios below 1.0 indicate potential difficulty meeting obligations while ratios above 3.0 may suggest underused assets.
• Use the current ratio alongside other metrics like quick ratio and cash flow forecasts since it only provides a snapshot at one point in time and treats all assets equally regardless of how quickly you can convert them to cash.
• Recognise that current ratio limitations include treating inventory the same as cash and ignoring payment timing, so combine it with working capital analysis and cash flow projections for better financial decision-making.

What is the current ratio?

The current ratio measures your business's ability to pay short-term bills and loan repayments using your available assets. You might also see it called the working capital ratio.

It's a type of liquidity ratio that gives you a broader view of your finances than the quick ratio. That's because it includes assets that take longer to convert to cash, like inventory.

What are current assets and current liabilities?

To calculate your current ratio, you need two numbers from your balance sheet: current assets and current liabilities. Both represent items due within one year.

Current assets are resources you can convert to cash within 12 months:

• Cash and cash equivalents: money in your bank accounts
• Accounts receivable: payments owed to you by customers
• Inventory: products you plan to sell
• Prepaid expenses: payments you've made in advance

Current liabilities are obligations you must pay within 12 months:

• Accounts payable: bills you owe to suppliers
• Short-term loans: debt due within the year
• Accrued expenses: costs you've incurred but not yet paid
• Current portion of long-term debt: loan payments due this year

You'll find both totals on your balance sheet, typically listed separately under "assets" and "liabilities."

How to calculate current ratio

Current ratio liquidity formula.

The current ratio formula is straightforward. Divide your total current assets by your total current liabilities.

Current ratio = current assets ÷ current liabilities

Both numbers come directly from your balance sheet, making this one of the easiest financial ratios to calculate.

Current ratio calculation example

Here's how the current ratio works in practice.

A small construction business wants to check whether it can cover upcoming loan repayments and material costs. The business has:

• Current assets: $250,000
• Current liabilities: $175,000

The current ratio calculation is:

$250,000 ÷ $175,000 = 1.43

What this means: The ratio is above 1.0, so the business can cover its upcoming obligations. For every $1 of liabilities, the company has $1.43 in available assets.

With this cushion, the business could invest in growth opportunities or hold onto the extra cash as a buffer for leaner periods.

How to interpret your current ratio

Understanding what your current ratio means helps you make better financial decisions.

What is a good current ratio?

A good current ratio typically falls between 1.5–3.0, but this can vary by industry. For instance, some companies with ratios as high as 3.9 can be considered healthy by analysts, depending on the specifics of the business.

Here's how to interpret different ranges:

• Above 1.0: your business can cover short-term debts and is generally healthy
• 1.5–3.0: you have a comfortable cushion to handle unexpected expenses
• Above 3.0: you may have excess assets that could be invested in growth
• Below 1.0: you may struggle to meet short-term obligations

A ratio below 1.0 can still be acceptable in certain situations. Growing businesses often see temporary dips when making investments. However, a ratio that stays below 1.0 long-term signals potential cash flow problems, as research shows that timely supplier payments support stronger financial performance.

When to measure: Calculate your current ratio at the same point each month, such as the last day of the month. Consistent timing lets you spot trends and compare results accurately.

Your current ratio is just one view of your finances. Combine it with other profitability ratios and cash flow forecasts for a complete picture.

Current ratio vs quick ratio and other liquidity ratios

Different liquidity ratios measure your financial health in different ways. Using several together gives you a more complete picture of your cash position.

• Quick ratio (acid test ratio): measures only assets you can convert to cash within 90 days, excluding inventory. Use this for a more conservative view of your liquidity
• Cash ratio: compares only cash and cash equivalents to current liabilities, excluding all other assets. Use this to see your immediate ability to pay bills

Each ratio answers a different question about your finances. Learn more about these metrics in our guide to liquidity ratios.

Current ratio in relation to working capital and cash flow

Current ratio relates closely to other measures of your business's spending power. Understanding how they connect helps you see your full financial picture.

• Working capital: the dollar amount left after subtracting current liabilities from current assets. It shows how much money you have available for day-to-day operations
• Cash flow: the net amount of money moving in and out of your bank account. It tracks the general availability of cash in your business
• Free cash flow: what remains after subtracting capital expenditure from operating cash flow. It shows your remaining cash after investing in equipment or property

While current ratio expresses your liquidity as a ratio, working capital shows it as a dollar amount. Academic research has identified an inverted U-shaped relationship between working capital management and financial performance, suggesting there is an optimal level to target.

What are the limitations of current ratio?

The current ratio is useful, but it has limitations you should understand.

• Point-in-time snapshot: the ratio only shows your position on one specific date. Your financial health can change daily.
• Treats all assets equally: cash is immediately available, but inventory might take months to sell. The ratio treats both the same.
• Ignores timing: it assumes all liabilities are due at once, when payments actually occur at different times throughout the period.
• Challenges for seasonal businesses: if your sales vary significantly by season, the ratio may not reflect your typical financial position.

For a complete view of your finances, use the current ratio alongside other metrics like cash flow forecasts and the quick ratio.

Track your current ratio easily with Xero

You can let Xero handle the complex calculations, giving you a clear picture of your business's financial health.

With Xero, you can:

• see cash flow at a glance: track what's coming in and going out in real time
• monitor performance indicators: watch key metrics like current ratio over time
• create forecasts: build projections using built-in reporting features
• make confident decisions: access the insights you need to plan ahead

Get one month free and see how Xero simplifies your financial management.

FAQs on current ratio

Here are answers to common questions about calculating and using the current ratio.

What is a good current ratio?

A good current ratio typically falls between 1.5–3.0, though this varies by industry. A ratio above 1.0 means you have enough current assets to cover current liabilities.

What does a current ratio of 2.5 mean?

A current ratio of 2.5 means you have $2.50 in current assets for every $1.00 of current liabilities. This indicates strong liquidity and the ability to meet short-term obligations comfortably.

Is a current ratio of 1.0 acceptable?

A current ratio of 1.0 is the minimum acceptable level, meaning you have just enough assets to cover liabilities. While you can meet immediate obligations, there's no buffer for unexpected expenses.

How often should I calculate my current ratio?

Calculate your current ratio monthly at a consistent point in your billing cycle. This lets you track trends over time and spot potential cash flow issues early.

What's the difference between current ratio and quick ratio?

Current ratio includes all current assets, while quick ratio excludes inventory and only counts assets convertible to cash within 90 days. Quick ratio provides a more conservative measure of immediate liquidity.