Liquidity Ratio Calculator
This tool calculates a key liquidity ratio, the Current Ratio, which measures a company's ability to pay off its short-term liabilities with its current assets.
Enter your Current Assets and Current Liabilities to find your Current Ratio.
Calculate Your Current Ratio
Understanding the Current Ratio
What is the Current Ratio?
The Current Ratio is a financial metric that assesses a company's ability to meet its short-term obligations (those due within one year) using its short-term assets (those expected to be converted to cash within one year).
Current Ratio Formula
The formula is simple:
Current Ratio = Current Assets / Current Liabilities
What the Ratio Means
- Ratio > 1: The company has more current assets than current liabilities. Generally indicates a good ability to cover short-term debts.
- Ratio = 1: Current assets exactly equal current liabilities. The company can cover short-term debts, but has no buffer.
- Ratio < 1: The company has fewer current assets than current liabilities. May indicate potential difficulty meeting short-term obligations.
Note: An excessively high ratio isn't always good; it might suggest inefficient use of assets (e.g., too much cash sitting idle).
Current Ratio Examples
Click on an example to see the calculation:
Example 1: Healthy Company
Scenario: A well-managed retail business.
Current Assets: $100,000
Current Liabilities: $40,000
Calculation: Current Ratio = $100,000 / $40,000 = 2.5
Result: Current Ratio = 2.5. Interpretation: Healthy liquidity, 2.5 times more current assets than current liabilities.
Example 2: Borderline Liquidity
Scenario: A startup facing cash flow challenges.
Current Assets: $50,000
Current Liabilities: $50,000
Calculation: Current Ratio = $50,000 / $50,000 = 1.0
Result: Current Ratio = 1.0. Interpretation: Can meet immediate obligations, but no buffer. Needs careful cash management.
Example 3: Potential Risk
Scenario: A company with significant short-term debt.
Current Assets: $75,000
Current Liabilities: $150,000
Calculation: Current Ratio = $75,000 / $150,000 = 0.5
Result: Current Ratio = 0.5. Interpretation: May struggle to cover short-term debts, indicating high liquidity risk.
Example 4: High Liquidity (Potentially Inefficient)
Scenario: A business with lots of cash and minimal debt.
Current Assets: $500,000
Current Liabilities: $80,000
Calculation: Current Ratio = $500,000 / $80,000 = 6.25
Result: Current Ratio = 6.25. Interpretation: Very high liquidity. While safe, could indicate assets (like cash) are not being invested effectively.
Example 5: Manufacturing Company
Scenario: Typical balance sheet values for a manufacturer.
Current Assets: $1,500,000
Current Liabilities: $750,000
Calculation: Current Ratio = $1,500,000 / $750,000 = 2.0
Result: Current Ratio = 2.0. Interpretation: A common benchmark for many industries, indicating solid short-term financial health.
Example 6: Service-Based Business
Scenario: A small consulting firm.
Current Assets: $80,000
Current Liabilities: $60,000
Calculation: Current Ratio = $80,000 / $60,000 ≈ 1.33
Result: Current Ratio ≈ 1.33. Interpretation: Moderate liquidity, capable of meeting short-term obligations.
Example 7: Seasonal Business (Low Point)
Scenario: A toy store at the end of January.
Current Assets: $150,000
Current Liabilities: $200,000
Calculation: Current Ratio = $150,000 / $200,000 = 0.75
Result: Current Ratio = 0.75. Interpretation: Low liquidity at this specific time, common for businesses after a peak season with bills arriving.
Example 8: Zero Current Liabilities
Scenario: A debt-free individual or entity with assets.
Current Assets: $10,000
Current Liabilities: $0
Calculation: Current Ratio = $10,000 / $0 (Division by zero)
Result: Error: Cannot divide by zero. Interpretation: Technically, liquidity is infinite as there are no current obligations.
Example 9: Zero Current Assets
Scenario: A situation with liabilities but no liquid assets.
Current Assets: $0
Current Liabilities: $5,000
Calculation: Current Ratio = $0 / $5,000 = 0
Result: Current Ratio = 0. Interpretation: Unable to meet any short-term obligations with current assets alone. High liquidity risk.
Example 10: Small Business
Scenario: A freelance graphic designer.
Current Assets: $12,000
Current Liabilities: $8,000
Calculation: Current Ratio = $12,000 / $8,000 = 1.5
Result: Current Ratio = 1.5. Interpretation: Decent liquidity for a small operation, a reasonable buffer.
Frequently Asked Questions about the Current Ratio
1. What is the Current Ratio?
The Current Ratio is a financial metric that measures a company's ability to pay off its short-term liabilities (due within one year) using its short-term assets (convertible to cash within one year).
2. How is the Current Ratio calculated?
It's calculated by dividing total Current Assets by total Current Liabilities: Current Ratio = Current Assets / Current Liabilities.
3. What is considered a "good" Current Ratio?
A commonly cited benchmark is a ratio of 2:1 (2.0), meaning current assets are twice current liabilities. However, what's "good" varies significantly by industry. Some industries operate efficiently with lower ratios (e.g., retail), while others require higher ratios (e.g., manufacturing).
4. Why is the Current Ratio important?
It's a key indicator of a company's short-term financial health and liquidity. It helps creditors assess risk and helps management understand their ability to meet immediate obligations.
5. What's included in Current Assets?
Common examples include Cash, Accounts Receivable (money owed by customers), Inventory, Short-term Investments, and Prepaid Expenses.
6. What's included in Current Liabilities?
Common examples include Accounts Payable (money owed to suppliers), Short-term Loans, Salaries Payable, and the portion of long-term debt due within one year.
7. What are the limitations of the Current Ratio?
It's a snapshot in time, doesn't account for the *quality* of assets (e.g., slow-moving inventory, bad receivables), doesn't consider the timing of cash flows, and benchmarks vary by industry.
8. Is a very high Current Ratio always good?
Not necessarily. While it indicates strong liquidity, an excessively high ratio might mean assets aren't being used efficiently. For instance, too much cash might be sitting in a low-interest account instead of being invested back into the business.
9. How is the Current Ratio different from the Quick Ratio (Acid-Test Ratio)?
The Quick Ratio is a stricter test of liquidity. It excludes Inventory and other less liquid current assets from the calculation: Quick Ratio = (Current Assets - Inventory) / Current Liabilities. It shows the ability to pay debts with assets *immediately* convertible to cash.
10. Can I get an error if Current Liabilities are zero?
Yes, dividing by zero is mathematically undefined. If a company has zero current liabilities, the Current Ratio calculation results in an error. This situation, while rare for operating businesses, implies infinite liquidity regarding current obligations.
