Current ratio: formula, calculation and examples

Published Tuesday 24 February 2026

Table of contents

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

Key takeaways

• Calculate your current ratio by dividing current assets by current liabilities to determine if you can cover short-term debts with available resources.
• Aim for a current ratio between 1.5 and 2.0, as this indicates healthy liquidity while avoiding excess cash that could be invested in growth opportunities.
• Measure your current ratio at the same time each month to track trends and make consistent comparisons rather than relying on one-off calculations.
• Combine current ratio with other financial metrics like cash flow forecasts and quick ratio to get a complete picture of your business's financial health.

What is the current ratio?

Current ratio measures your ability to pay short-term debts using your short-term assets. It's a liquidity ratio that shows whether you can cover upcoming bills and loan repayments. You might also see it called the working capital ratio.

Current ratio is broader than the quick ratio, which is often considered a more conservative measure of liquidity, because it includes all current assets, even those that take longer to convert to cash, like inventory.

How to calculate current ratio

Use this formula to calculate your current ratio.

Current ratio liquidity formula.

To calculate current ratio, you need two numbers from your balance sheet: current assets and current liabilities.

Current assets

Current assets are resources you expect to convert into cash within one year:

• cash and cash equivalents
• accounts receivable
• inventory
• prepaid expenses
• short-term investments

Current liabilities

Current liabilities are obligations you must pay within one year:

• accounts payable
• short-term loans and credit lines
• accrued expenses
• taxes payable
• current portion of long-term debt

The current ratio formula:

Current ratio calculation example

This example shows current ratio in practice:

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

The business has $250,000 in current assets and $175,000 in current liabilities.

The current ratio calculation is:

$250,000 / $175,000 = 1.43

The current ratio is above one, which means the company can cover upcoming liabilities. For every $1 of liabilities, the company has $1.43 available.

It might also be possible for the company to invest in other areas with the remaining cash. Or, the business could hang on to its extra cash in case there's a time when its assets are lower and liabilities are higher.

How to interpret your current ratio

Your current ratio tells you whether your business can pay its bills. Reading the numbers:

• Above 1.0: Your business can cover short-term debts and is generally in good shape. Research suggests a ratio between 1.5 and 2.0 is a normal and acceptable value. For every dollar you owe, you have more than a dollar available.
• Below 1.0: You'll want to improve your cash position to comfortably pay upcoming bills. This happens sometimes, especially for growing businesses making investments. Aim to return above 1.0 as soon as possible.
• Very high (above 3.0): You may have cash available for investment opportunities. Consider whether you could invest in growth or development.

When to measure

Current ratio changes throughout your billing cycle. Measure it at the same time each month to compare like for like and spot long-term trends.

Use it alongside other metrics

Current ratio is just one view of your finances. Combine it with other profitability ratios and cash flow forecasts for a complete picture, as some studies indicate a positive correlation with profitability for the current ratio.

What are the limitations of using the current ratio?

Current ratio gives you a useful snapshot. For a complete picture, consider these additional factors:

• Asset quality varies: Cash is ready to spend immediately, but inventory might take months to sell. Current ratio counts both equally.
• Timing isn't reflected: The ratio assumes all liabilities are due at once, but payments happen at different times throughout the month.
• Cash flow changes daily: Your ratio on one day might look different from the next, depending on when payments come in and go out.
• Seasonal swings affect the picture: If your business has busy and quiet periods, a single ratio might not represent your typical financial health.

For a more complete view, track your ratio over time and combine it with cash flow forecasting.

Current ratio vs quick ratio and other liquidity ratios

Current ratio includes all current assets, but other liquidity ratios give you different views by being more selective about what they count.

Quick ratio (acid test ratio): Includes only assets you can convert to cash within 90 days. It excludes inventory, giving you a more conservative view of liquidity.

Cash ratio: The strictest measure. It only counts cash and cash equivalents against current liabilities, excluding all other assets.

Each ratio answers a slightly different question about your cash position. Using them together helps you understand your liquidity from multiple angles. Learn more 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. These metrics connect in the following ways:

• Working capital: The difference between current assets and current liabilities. While current ratio expresses this as a ratio, working capital shows the actual dollar amount available after covering short-term obligations.
• Cash flow: The net movement of money in and out of your bank account. Current ratio shows capacity to pay; cash flow shows actual money moving.
• Free cash flow: What remains after subtracting capital expenditure from operating cash flow. It indicates how much cash you have left after investing in equipment or property.

Understanding how these metrics interact gives you a fuller picture of your financial position.

Track your current ratio with Xero

Xero handles the calculations so you can focus on what the numbers mean for your business. Xero helps you:

• Monitor your financial position in real time
• Track how your ratios trend month to month
• Use reporting features to project future cash positions
• Access the insights you need to plan confidently

Get one month free to start tracking your business health with confidence.

FAQs on current ratio

Common questions about current ratio answered below.

What is a good current ratio?

A good current ratio typically falls between 1.5–3.0, though this varies by industry. For example, sectors like utilities and consumer staples often have higher current ratios, while technology and biotechnology companies may have lower ones. Ratios above 1.0 indicate you can cover short-term debts, while ratios between 1.5–2.0 suggest a healthy balance between liquidity and efficient asset use.

Is 1.0 a good current ratio?

A current ratio of 1.0 means you have exactly enough assets to cover your liabilities. While it's the minimum threshold for meeting obligations, most businesses aim higher to provide a safety buffer.

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 of current liabilities. This indicates strong liquidity, though if it stays consistently high, you might consider whether excess cash could be invested in growth.

How often should I calculate my current ratio?

Calculate your current ratio monthly, at the same point in your billing cycle each time. This gives you consistent data to spot trends and make timely decisions about cash management.

Can my current ratio be too high?

Yes. A very high current ratio (above 3.0) might indicate an opportunity to invest excess cash or inventory in growth. Consider whether excess assets could support growth initiatives.