Current ratio formula
Example
A company with ₹20 lakh of current assets and ₹11.5 lakh of current liabilities has a current ratio of 1.74. It has ₹1.74 of short-term assets for every ₹1 it owes in the next year.
Interpreting the current ratio
| Current ratio | What it usually means |
|---|---|
| Below 1.0 | Short-term obligations exceed short-term assets, which is a liquidity risk |
| 1.0 – 1.2 | Tight. Little room if collections slow down |
| 1.2 – 2.0 | Comfortable for most businesses |
| Above 2.0 | Very liquid, possibly with idle cash or excess stock |
Ideal levels vary by industry: manufacturers carrying inventory often have higher ratios than service or retail businesses with fast cash cycles. Compare against peers and against the company's own trend.
Limitations
The current ratio treats all current assets as equally liquid, but slow-moving inventory or doubtful receivables may not turn into cash in time. The quick ratio removes inventory for a stricter test.
Frequently asked questions
What is a good current ratio?
Generally 1.2 to 2. Below 1 suggests difficulty meeting short-term obligations; very high ratios can mean inefficient use of assets.
Can a company with a good current ratio still run out of cash?
Yes, if most current assets are inventory or receivables that cannot be collected in time. Look at the quick ratio and cash flow too.
Results are for planning and information only and are not accounting or financial advice. Check important figures with your accountant.
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