Current Ratio
Current assets divided by current liabilities. The standard short-term liquidity ratio: how many dollars of current assets cover each dollar of current liabilities.
When to use: First-look liquidity check. >2 is generally healthy; <1 means current liabilities exceed current assets — potential short-term cash crunch. Industry context matters: retailers and grocers often run thin (high inventory turnover, fast cash) while heavy industrials run wider.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| CR | Current Ratio | Current assets / current liabilities | integer |
| CurrentAssets | Current Assets | Cash + receivables + inventory + other current assets | $ |
| CurrentLiabilities | Current Liabilities | Accounts payable, short-term debt, and other liabilities due within one year | $ |
Real-Life Examples
Example 1: Healthy Mid-Cap
Current assets $400M, current liabilities $200M.
Given
Step-by-Step
Current ratio of 2.0 — comfortably above the rule-of-thumb floor. Liquidity is healthy.
Example 2: Tight Liquidity
Current assets $90M, current liabilities $100M.
Given
Step-by-Step
CR of 0.90 — current liabilities exceed current assets, a yellow flag. Drill into the quick ratio to see how much of CA is tied up in inventory.
Frequently Asked Questions
No. Very high CR can signal idle cash, slow-moving inventory, or uncollected receivables — capital not being deployed productively. The optimum is industry-specific; healthy is "comfortably above 1, not so high that working capital is bloated."
It treats inventory and receivables as if they convert to cash on demand. They don't — inventory has to be sold (sometimes at discount), receivables have to be collected. Quick and cash ratios strip away those lag-prone components.