Current Ratio Calculator

Complete Guide: Current Ratio Calculator

The current ratio is a core liquidity measure: it compares a company's current assets to its current liabilities to indicate whether near‑term obligations can be met without raising additional capital. This page goes beyond the formula with practical interpretation, industry context, and steps you can take to improve day‑to‑day liquidity.

Current Ratio Formula

Current Ratio = Current Assets ÷ Current Liabilities

Current assets normally include cash and cash equivalents, short‑term investments, accounts receivable (net of allowances), inventory, and prepaid/other current assets. Current liabilitiestypically include accounts payable, short‑term debt, accrued expenses, the current portion of long‑term debt, and deferred revenue or other current obligations.

Current Ratio vs Quick Ratio (Acid‑Test)

The quick ratio focuses on the most liquid assets and excludes inventory and prepaid items: (Cash + Short‑Term Investments + Accounts Receivable) ÷ Current Liabilities. Companies with heavy inventory can show a comfortable current ratio while their quick ratio reveals a tighter liquidity profile.

• Use both ratios together to see the impact of inventory and prepaid balances.
• Track the trend over multiple quarters; one snapshot can be misleading.
• Benchmark by industry; what's normal varies widely by sector.

What's a Good Current Ratio?

There is no universal "right" number. As a rule of thumb, many mature businesses target a range around 1.5–2.5. Asset‑light models (SaaS, consulting) can operate closer to 1.0, while inventory‑intensive models (retail, distribution, manufacturing) often require higher buffers due to the time needed to convert inventory into cash.

• Below 1.0: Negative working capital; potential liquidity stress unless the cash conversion cycle is extremely fast.
• 1.0–1.5: Tight but workable for asset‑light businesses with predictable cash inflows.
• 1.5–3.0: Generally healthy for many sectors; monitor mix of receivables vs inventory.
• Above 3.0: Liquidity is strong, but you may be holding idle assets or excess inventory.

Interpreting Your Results

Use the ratios together with working capital (Current Assets − Current Liabilities) and your cash conversion cycle:

• Receivables: High receivables can inflate liquidity if collections are slow; monitor aging.
• Inventory: Large or slow‑moving inventory can raise the current ratio without improving cash.
• Payables and short‑term debt: Front‑loaded obligations can compress the ratio seasonally.

Common Pitfalls

• Window dressing: End‑of‑period actions (e.g., delaying purchases) can temporarily boost the ratio.
• Classification risks: Misclassifying long‑term items as current can overstate liquidity.
• Seasonality: Compare to the same quarter last year and view trailing averages.
• Quality of current assets: Not all receivables are equally collectible; watch allowances and write‑offs.

How to Improve Liquidity

• Accelerate collections: Tighten credit terms, send reminders, offer early‑payment discounts.
• Optimize inventory: Adopt demand‑driven planning, reduce SKUs, improve turnover.
• Manage payables: Negotiate longer terms where appropriate and avoid late‑payment penalties.
• Refinance short‑term obligations: Match debt maturities to asset lives; consider terming‑out lines of credit.
• Build cash buffers: Maintain sufficient reserves for seasonality and shocks.

Examples

Example 1 (Asset‑Light SaaS): Current assets = $175,000 (cash $90,000; short‑term investments $25,000; AR $60,000; inventory $0; prepaid $0). Current liabilities = $130,000 (AP $70,000; ST debt $5,000; accrued $18,000; current LTD $7,000; deferred revenue $30,000). Current ratio = 1.35; quick ratio = 1.31; working capital = $45,000. Interpretation: Tight but acceptable given rapid cash conversion and recurring revenue.

Example 2 (Inventory‑Heavy Retail): Current assets = $120,000 (cash $25,000; ST investments $2,000; AR $15,000; inventory $75,000; prepaid $3,000). Current liabilities = $89,000. Current ratio = 1.35; quick ratio = 0.47. Interpretation: Liquidity depends on inventory turnover; watch aging and markdown risk.

Example 3 (Manufacturing): Current assets = $226,000; current liabilities = $147,000. Current ratio = 1.54; quick ratio = ~0.68; working capital = $79,000. Interpretation: Reasonable cushion; improvement levers include inventory planning and receivables acceleration.

Methodology & Notes

• This tool performs all calculations locally in your browser. We don't store or transmit your data.
• Ratios are rounded to two decimals for readability.
• Industry benchmarks vary; use this tool with peer comparisons and multi‑period trends.