Liquidity ratio comparing all current assets with current liabilities to assess short-term coverage.
The current ratio is the liquidity ratio that compares current assets with current liabilities. It shows how much short-term asset coverage a business has relative to obligations due within the same near-term window.
The ratio is a fast way to judge whether the balance sheet appears tight or comfortably positioned in the short run. It is widely used in lending, management review, audit planning, and basic statement analysis.
The standard formula is:
Current ratio = current assets / current liabilities.
A result above 1.0 means current assets exceed current liabilities. That does not automatically mean liquidity is strong, because inventory quality, receivable collectibility, and payable timing still matter. The ratio is most useful when compared across periods or against similar businesses.
If current assets are 240,000 and current liabilities are 160,000, the current ratio is 1.5:
| Current Assets | Current Liabilities | Current Ratio |
|---|---|---|
| 240,000 | 160,000 | 1.5 |
That means the business has 1.50 of current assets for each 1.00 of current liabilities.
A higher current ratio is not always better. A ratio can rise because cash is idle, inventory is bloated, or receivables are aging poorly. The measure also does not show whether assets can actually be converted to cash quickly, which is why analysts often compare it with the quick ratio or cash ratio.