Glossary · UK
What is Current Ratio?
A liquidity ratio showing whether a business has enough short-term assets to cover its short-term debts.
Full Definition
The current ratio is a widely used measure of a business's short-term financial health, calculated by dividing current assets (cash, stock, and money owed by customers) by current liabilities (money owed to suppliers, short-term loans, and other bills due within a year). A ratio above 1 generally suggests a business can cover its immediate obligations from assets it expects to turn into cash within the next twelve months, while a ratio below 1 can be a warning sign of a potential cash flow squeeze, though the "right" level varies significantly by industry -- retailers with fast-moving stock can often operate comfortably with a lower ratio than a manufacturer with long production cycles. Lenders, suppliers offering credit terms, and investors often check the current ratio as a quick liquidity health check before extending credit or investing, though it is a point-in-time snapshot from the balance sheet and does not show how quickly stock can actually be sold or debtors will actually pay, which is why it is usually read alongside the more conservative quick ratio and a cash flow forecast.
How Current Ratio is calculated
Current ratio = Current assets / Current liabilities- Current assets
- Cash, stock/inventory and debtors expected to convert to cash within 12 months.
- Current liabilities
- Debts and obligations due within 12 months.
Worked example: A business with GBP 120,000 of current assets and GBP 80,000 of current liabilities has a current ratio of 120,000 / 80,000 = 1.5, meaning it holds GBP 1.50 of short-term assets for every GBP 1 of short-term debt.