Definition
Current ratio measures short-term liquidity: current assets divided by current liabilities. Higher usually implies more near-term flexibility.
Formula
Current ratio = current assets / current liabilities
Example
If current assets are $1.2M and current liabilities are $800k, current ratio is 1.5x.
How to use it
- Interpret with context: a high ratio can still hide slow collections (AR).
- Track trends, not only a single snapshot, especially during rapid growth.
- Use with DSO and AP aging to see liquidity quality.
Common mistakes
- Counting inventory as fully liquid when it moves slowly.
- Using current ratio without trend or seasonality context.
Measured as
Current ratio = current assets / current liabilities
Misused when
- Counting inventory as fully liquid when it moves slowly.
- Using current ratio without trend or seasonality context.
Operator takeaway
- Interpret with context: a high ratio can still hide slow collections (AR).
- Track trends, not only a single snapshot, especially during rapid growth.
- Use with DSO and AP aging to see liquidity quality.
- Tie Current Ratio to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Read Cash conversion cycle: turn working capital into runway if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
- Decide whether Current Ratio belongs in cash planning, valuation, or debt monitoring so the number is used in the right model.
Where to use this on MetricKit
Guides
- Cash conversion cycle: turn working capital into runway: A practical guide to the cash conversion cycle (CCC): how AR/AP timing changes cash, how to reduce days outstanding, and why runway depends on working capital.