Learn how to calculate current ratio and what it tells you about your business's ability to pay short-term bills.
The current ratio measures your business's ability to pay short-term obligations with current assets. Formula: Current Ratio = Current Assets ÷ Current Liabilities. A ratio of 1.0 means assets exactly equal liabilities; 1.5-2.0 is considered healthy. Below 1.0 means you may struggle to pay bills. It's a key working capital measure that lenders use to assess short-term financial health.
Current Ratio = Current Assets ÷ Current Liabilities
Learn more about working capital and use our working capital calculator.
Business: Retail store
Current Assets:
Current Liabilities:
Current Ratio = $80,000 ÷ $40,000 = 2.0
✓ Healthy ratio - Business can easily cover short-term obligations
Strong liquidity. You have twice the assets needed to cover liabilities. May indicate excess cash that could be invested in growth.
Healthy liquidity. Comfortable cushion to cover short-term obligations and handle unexpected expenses.
Adequate but tight. You can cover obligations but have little margin for error. Monitor closely.
Insufficient current assets to cover liabilities. High risk of cash flow problems. Consider financing to improve liquidity.
Both measure liquidity, but quick ratio is more conservative:
Learn about quick ratio formula to understand the difference.
Build cash reserves, speed up receivables collection, or optimize inventory levels. More current assets improve the ratio.
Pay down short-term debt, negotiate longer payment terms with vendors, or convert short-term debt to long-term debt.
A working capital loan or business line of credit can boost current assets and improve the ratio.
A ratio of 1.5-2.0 is considered healthy for most small businesses. Below 1.0 is risky, and above 2.5 may indicate excess cash that could be invested. Industry norms vary—retail may need higher ratios due to inventory, while service businesses may be fine with lower ratios.
Yes. A ratio above 2.5-3.0 may indicate you're holding too much cash or inventory that could be invested in growth. However, high is better than low—it's a good problem to have.
Lenders check current ratio to assess short-term financial health. Ratios below 1.0 are red flags. Ratios of 1.5+ improve approval chances and may get better rates. Learn about how to qualify for business loans.
Current ratio is a ratio (assets ÷ liabilities). Working capital is the dollar difference (assets - liabilities). Both measure liquidity, but ratio is easier to compare across businesses. Learn about what working capital is.
More conservative liquidity measure that excludes inventory.
Understand working capital and its relationship to current ratio.
Calculate your working capital and current ratio.
Improve your current ratio with flexible working capital financing.
Our team can help you understand your financial ratios and find financing to improve liquidity.
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