Current Ratio Calculator
This calculator determines a company's current ratio, a key liquidity metric that measures its ability to cover short-term obligations with current assets.
Enter the company's current assets and current liabilities to calculate the ratio. A ratio above 1 indicates good short-term financial health.
Enter Financial Data
Understanding the Current Ratio
What is the Current Ratio?
The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations (due within one year) with its current assets. It's calculated as:
Current Ratio = Current Assets / Current Liabilities
Interpretation Guidelines
- Below 1.0: Potential liquidity issues (assets < liabilities)
- 1.0-1.5: Marginal liquidity position
- 1.5-3.0: Healthy liquidity position
- Above 3.0: May indicate inefficient use of assets
Components Explained
Current Assets: Cash, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets expected to be converted to cash within a year.
Current Liabilities: Accounts payable, short-term debt, accrued liabilities, and other obligations due within a year.
Net Working Capital
Also calculated is Net Working Capital, which shows the absolute dollar difference:
Net Working Capital = Current Assets - Current Liabilities
Real-World Current Ratio Examples
Example 1: Healthy Company
Scenario: A manufacturing company with strong liquidity.
Current Assets: $500,000
Current Liabilities: $250,000
Calculation: $500,000 / $250,000 = 2.0
Interpretation: Excellent liquidity (ratio of 2.0)
Example 2: Struggling Retailer
Scenario: A retailer facing cash flow problems.
Current Assets: $150,000
Current Liabilities: $180,000
Calculation: $150,000 / $180,000 = 0.83
Interpretation: Potential liquidity crisis (ratio below 1)
Example 3: Tech Startup
Scenario: A newly funded technology startup.
Current Assets: $2,000,000
Current Liabilities: $400,000
Calculation: $2,000,000 / $400,000 = 5.0
Interpretation: Very high ratio (may indicate excess cash)
Example 4: Service Business
Scenario: A consulting firm with minimal inventory.
Current Assets: $120,000
Current Liabilities: $90,000
Calculation: $120,000 / $90,000 = 1.33
Interpretation: Adequate liquidity position
Example 5: Seasonal Business
Scenario: A holiday decor company during off-season.
Current Assets: $300,000
Current Liabilities: $320,000
Calculation: $300,000 / $320,000 = 0.94
Interpretation: Temporary low ratio due to seasonality
Example 6: Large Corporation
Scenario: A Fortune 500 company's balance sheet.
Current Assets: $50,000,000
Current Liabilities: $35,000,000
Calculation: $50,000,000 / $35,000,000 = 1.43
Interpretation: Standard ratio for mature company
Example 7: Quick Growth Company
Scenario: A rapidly expanding e-commerce business.
Current Assets: $1,200,000
Current Liabilities: $1,100,000
Calculation: $1,200,000 / $1,100,000 = 1.09
Interpretation: Tight liquidity during growth phase
Example 8: Cash-Rich Business
Scenario: A company with significant cash reserves.
Current Assets: $5,000,000
Current Liabilities: $1,000,000
Calculation: $5,000,000 / $1,000,000 = 5.0
Interpretation: Extremely liquid (possibly too much)
Example 9: Inventory Heavy Business
Scenario: A furniture manufacturer with large inventory.
Current Assets: $800,000
Current Liabilities: $600,000
Calculation: $800,000 / $600,000 = 1.33
Interpretation: Ratio looks OK, but inventory may not be liquid
Example 10: Service Company with Subscriptions
Scenario: A SaaS company with annual subscriptions.
Current Assets: $900,000
Current Liabilities: $300,000
Calculation: $900,000 / $300,000 = 3.0
Interpretation: High ratio due to deferred revenue
Frequently Asked Questions
1. What is a good current ratio?
Generally, a ratio between 1.5 and 3.0 is considered healthy. Below 1.0 may indicate liquidity problems, while above 3.0 may suggest inefficient asset use.
2. How does current ratio differ from quick ratio?
The quick ratio (acid-test) excludes inventory from current assets, providing a more conservative liquidity measure.
3. Can a current ratio be too high?
Yes. While high ratios indicate strong liquidity, they may also suggest excess cash or inventory that could be better utilized.
4. What industries have different ratio standards?
Retail often has lower ratios (1.0-1.5) due to quick inventory turnover, while manufacturing may need higher ratios (2.0+) because of slower inventory conversion.
5. How often should current ratio be calculated?
It should be monitored quarterly at minimum, or monthly for businesses with tight cash flow.
6. What if my ratio is below 1.0?
This suggests potential difficulty meeting short-term obligations. Consider increasing current assets (through sales or financing) or restructuring liabilities.
7. Does a high ratio guarantee financial health?
No. The ratio doesn't account for the quality or liquidity of specific current assets (like slow-moving inventory).
8. How can I improve my current ratio?
Options include: increasing sales to boost cash, collecting receivables faster, converting short-term to long-term debt, or managing payables more effectively.
9. What's better: high current ratio or high ROE?
They measure different things. Current ratio assesses liquidity, while ROE measures profitability. The ideal balance depends on your business model and industry.
10. How does seasonality affect current ratio?
Seasonal businesses may show fluctuating ratios throughout the year, which should be considered when evaluating financial health.
