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Metric · Liquidity

Current Ratio Explained

The current ratio relates current assets to current liabilities. It shows whether a company can cover its short-term payment obligations from assets available in the short term.

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Updated 20266 min read
Formula
Current ratio = Current assets ÷ Current liabilities
> 1.5Solid liquidity
1.0–1.5Moderate liquidity
< 1.0Tight liquidity
Guideline values, industry-dependent, illustrative

The formula in detail

The components of the formula at a glance.

Numerator
Current assets
Cash, receivables and inventory (assets liquidatable within a year).
Denominator
Current liabilities
Liabilities due within a year.

Calculator

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Result current ratio
Solid liquidity
1.5
1
A value above 1.5 shows solid short-term liquidity with an adequate buffer.
2
A value below 1.0 means current liabilities mathematically exceed current assets, a warning sign, though not always critical depending on the business model.
3
Retail businesses with fast inventory turnover (e.g. grocery) can structurally operate with lower values than manufacturers.

Used in these strategies

Piotroski F-Score (9-Point Check)Nine hard balance-sheet criteria: separating substance from downward spirals.Altman Z-Score: Stress TestThe bankruptcy early-warning system: five balance-sheet ratios, one risk score.

Frequently asked questions

As a rough guideline, a value above 1.5 counts as solid and below 1.0 as tight. But the business model and typical inventory turnover in the industry matter a great deal.
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Not investment advice. This explanation is for informational purposes only and does not constitute a recommendation to buy or sell securities.

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