Investing term
What is Current ratio?
Current assets ÷ current liabilities. Above 1 means the company can cover next year's bills from current assets.
The current ratio is current assets divided by current liabilities — a quick gauge of whether a company can pay its near-term bills. Above 1 means current assets more than cover what's due within the year; below 1 means they don't, at least on paper.
It's a first-glance liquidity check, useful for spotting obvious strain. Far below 1 can signal a looming cash squeeze, where the company doesn't have enough liquid resources to meet its short-term obligations. But a very high current ratio isn't automatically good — it can mean cash sitting idle or inventory piling up rather than being put to work. Like all single ratios, it's a starting point, not a verdict: it depends on the industry, the quality of the current assets, and the timing of what's due.
The current ratio is current assets ÷ current liabilities — above 1 means near-term bills are covered on paper. A first-glance liquidity screen, but it treats slow inventory the same as cash.
For example
A company with $30M of current assets and $20M of current liabilities has a current ratio of 1.5 — comfortably able to cover the coming year's bills on paper.
Learn it by doing
That's Current ratio in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 14, Reading Financial Statements).
Try the free lesson →Why it matters to you
The current ratio matters as a fast, standardised liquidity screen — one number that flags whether a company can plausibly meet its short-term obligations. It's a common first check because it's simple and comparable across companies. But its simplicity is also its limit: it treats all current assets as equally liquid and ignores timing, so it's best used to spot outliers worth investigating, not as a final judgement on financial health.
⚠ Reading a high ratio as automatically healthy
A very high current ratio can look reassuring but may signal inefficiency — cash sitting idle or inventory piling up rather than being deployed productively. And because the ratio treats slow inventory the same as cash, a company can show a comfortable ratio while being less liquid than it appears. Use it to flag outliers, then look at the quality and timing of the underlying assets.