Debt and bankruptcy risk · updated October 21, 2026
What is the current ratio and how is it calculated
The current ratio shows whether the assets that turn into cash within a year (cash, receivables, inventory) cover the bills due over the same period. Above 1 means the company has more short-term assets than short-term liabilities.
The current ratio formula
- Current assets
- Cash, money owed by customers, inventory: everything that becomes cash within a year.
- Current liabilities
- Suppliers, salaries, loans and interest due within the next year.
Worked example
A company has $3 billion of current assets and $2 billion of current liabilities.
For every dollar it has to pay over the next year, the company has $1.50 that will turn into cash.
How to read the current ratio
Supermarkets and restaurants often have a ratio below 1, because customers pay on the spot and suppliers get paid later. There it is not a bad sign.
When the current ratio can fool you
Hard-to-sell inventory: it counts as a current asset, but may be worth less than on the balance sheet.
Related terms
Questions about the current ratio
What is a good current ratio?
Between 1.2 and 2 for most industrial companies. More important is that it does not fall year after year.
These explanations are for information only. They are not a recommendation to buy or sell.
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