Current ratio: formula, benchmark and worked example

The current ratio is calculated by dividing current assets by current liabilities. It is the best-known liquidity ratio and shows whether a company can pay its obligations due within a year from assets that convert to cash within that same year.

For controllers the current ratio is the fastest read on working capital: it combines inventory, receivables and cash into a single number, which is why it appears in nearly every monthly report and bank covenant.

The current ratio formula

Current ratio = current assets / current liabilities

1. Add up current assets: inventory, receivables, other short-term receivables and cash.
2. Add up current liabilities: payables, tax liabilities, overdraft and other obligations due within a year.
3. Divide current assets by current liabilities.

The result is a factor, not a percentage: 1.5 means there is €1.50 of current assets for every euro of current liabilities.

Worked example

Item	Amount
Inventory	€300,000
Receivables	€450,000
Cash	€150,000
Current assets	€900,000
Current liabilities	€600,000
Current ratio	1.5

Current ratio = 900,000 / 600,000 = 1.5.

What is a good current ratio?

A current ratio between 1.5 and 2 is generally seen as healthy. Below 1, current liabilities exceed current assets and there is real liquidity risk. Well above 2 may point to too much cash tied up in inventory or receivables: capital that isn't earning a return. Retail and hospitality structurally run lower ratios than manufacturing, so always test against the sector benchmark.

Current ratio versus quick ratio

The current ratio includes inventory, which cannot always be converted quickly. The quick ratio excludes it:

Quick ratio = (current assets − inventory) / current liabilities

In the example above: (900,000 − 300,000) / 600,000 = 1.0. Use both side by side: the current ratio for the overall picture, the quick ratio for the stricter scenario. For actual cash planning, add a weekly cash flow forecast.

How to improve the current ratio

• Shorten payment terms: invoice faster and chase receivables actively.
• Reduce inventory: free up working capital tied in slow-moving stock.
• Refinance short to long: convert short-term debt into a long-term loan.
• Retain earnings: strengthen the cash position instead of paying out.

Frequently asked questions about the current ratio

How do you calculate the current ratio?
Divide current assets by current liabilities. Both figures come straight from the balance sheet.

What is the difference between the current ratio and the quick ratio?
The quick ratio leaves inventory out of the numerator, making it a stricter measure of immediate payment capacity.

What does a current ratio below 1 mean?
Current liabilities exceed current assets. Without extra financing or faster collection, a payment problem will arise.

Is a high current ratio always good?
No. A very high ratio often means unnecessary working capital in inventory and receivables, and therefore a lower return on capital.

Track liquidity ratios automatically

Smartbooks calculates the current ratio, quick ratio and solvency ratio from your ledger automatically, every month and per entity. Book a demo and see it on your own balance sheet.