Current Ratio

Liquidity ratios Print Email

Current ratioefinition

The current ratio is balance-sheet financial performance measure of company liquidity.

The current ratio indicates a company's ability to meet short-term debt obligations. The current ratio measures whether or not a firm has enough resources to pay its debts over the next 12 months. Potential creditors use this ratio in determining whether or not to make short-term loans. The current ratio can also give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. The current ratio is also known as the working capital ratio.

Calculation (formula)

The current ratio is calculated by dividing current assets by current liabilities:

The current ratio = Current Assets / Current Liabilities

Both variables are shown on the balance sheet (statement of financial position).

Norms and Limits

The higher the ratio, the more liquid the company is. Commonly acceptable current ratio is 2; it's a comfortable financial position for most enterprises. Acceptable current ratios vary from industry to industry. For most industrial companies, 1.5 may be an acceptable current ratio.

Low values for the current ratio (values less than 1) indicate that a firm may have difficulty meeting current obligations. However, an investor should also take note of a company's operating cash flow in order to get a better sense of its liquidity. A low current ratio can often be supported by a strong operating cash flow.

If the current ratio is too high (much more than 2), then the company may not be using its current assets or its short-term financing facilities efficiently. This may also indicate problems in working capital management.

All other things being equal, creditors consider a high current ratio to be better than a low current ratio, because a high current ratio means that the company is more likely to meet its liabilities which are due over the next 12 months.

Exact Formula in the ReadyRatios Analytic Software

Current ratio = F1[CurrentAssets]/F1[CurrentLiabilities]

F1 – Statement of financial position (IFRS).

Current ratioIndustry benchmark

Average values for the ratio you can find in our industry benchmarking reference bookCurrent ratio.

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Quote Guest, 3 May, 2017
excl... thanks,
Quote Guest, 4 October, 2017
Thanks...really helpful.
Quote Guest, 16 January, 2018
Why most of retail company in UK operate in less than 1 current ratio.
Quote Guest, 28 November, 2018
  1. Current ratio of a departmental store is 2 times however its quick ratio is 0.20 times. Interpret (in terms of favorable/unfavorable) its liquidity position along with logic.
2.  The debt ratios of a manufacturing company and a banking company are 0.80 and 0.65 respectively. Interpret the leverage positions for both of the companies.
Quote Guest, 1 July, 2019
what happen if Current ratio is less then 1 and operating cash flow is also negative for the period
Quote Guest, 6 June, 2020
what if my current ratio is 0.84 how can i explain it  
Quote Guest, 7 June, 2020
Great effort really useful
Quote Guest, 1 May, 2021
If there is given Group and company for current asset ad current liability..what should we use to calculate Current ratio?
Quote Guest, 28 November, 2021
what happens when the current liabilities are negative
for eg. current assets = $1.46 Million
and current liabilities = $(-0.04) Million + $0.02 Million

How do we calculate current ratio now, do we report it to be -73 or +75
Pages: Prev. 1 2

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