The current ratio is current assets divided by current liabilities. It tells you whether a business can cover the obligations due within the next year from the assets it expects to turn into cash in that time.
CFI also calls it the working capital ratio. It's a quick liquidity check, and it's one of the few numbers you can work out in a minute from a balance sheet. The figures on this page are CFI's own worked example, as of October 2026.
The current ratio formula
Current ratio = current assets / current liabilities
Both totals sit on the balance sheet, not the profit and loss. If you're not sure which report is which, my guide to the profit and loss vs balance sheet shows where each figure lives. Then it's four steps:
- Add up your current assets: everything due to you or convertible to cash within a year.
- Add up your current liabilities: everything you have to pay within a year.
- Divide the assets by the liabilities.
- Read the result next to your cash position, not instead of it.
Worked example: CFI's 2.0x company
CFI's example company has these balances:
| Line | Amount | Type |
|---|---|---|
| Cash | $15 million | Current asset |
| Marketable securities | $20 million | Current asset |
| Inventory | $25 million | Current asset |
| Total current assets | $60 million | |
| Short-term debt | $15 million | Current liability |
| Accounts payable | $15 million | Current liability |
| Total current liabilities | $30 million | |
| Current ratio | 60 / 30 = 2.0x | CFI's example |
CFI reads a ratio of 2 as the business being able to settle each dollar of loans or accounts payable twice over.
What counts as a current asset and a current liability
CFI's list of current assets is longer than most people expect:
- Cash
- Cash equivalents: securities that mature in 90 days or less
- Marketable securities that mature within a year
- Accounts receivable, net of an allowance for doubtful accounts
- Notes receivable
- Other receivables, such as insurance claims, employee advances and tax refunds
- Inventory: raw materials, work in process and finished goods
- Office supplies
- Prepaid expenses
Current liabilities are the obligations owed to suppliers and creditors, plus other payments due within a year. CFI includes notes payable (the interest and principal due within the year) and accounts payable. If your supplier bills are the bulk of that side, one of the accounts payable automation tools I've reviewed will keep every due date in view.
The catch: liquidity isn't the same as cash
CFI is clear that the current ratio measures liquidity using all current assets, and that's different from your actual cash position. Look at that list again. Inventory, prepaid expenses and office supplies all count towards the ratio, but you can't pay a supplier with a box of stock or a year of prepaid insurance.
Run CFI's own figures without the inventory and you see why it matters. Cash and marketable securities come to 35 million against liabilities of 30 million, a ratio of about 1.17. Still above 1, but with far less room. A 2.0x ratio built mostly on stock isn't as strong as the same ratio built on cash.
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Is a high current ratio always good?
CFI says a ratio of more than 1 suggests financial wellbeing. Below 1, current liabilities are bigger than current assets, so the business doesn't have enough short-term assets to cover what falls due within the year.
More isn't always better, though. CFI says there's no upper limit on what counts as too much, because it depends heavily on the industry. And a very high ratio can mean a company is leaving excess cash unused when it could be investing it in growing the business.
My take on the current ratio
Use it as a quick check, then look at what's underneath it. A ratio above 1 is a good sign, but if most of your current assets are stock or unpaid invoices, what you've got is a promise of cash, not cash. Pair the ratio with a forecast that shows when cash lands; my list of the best cash flow forecasting software has tools that do that.
Frequently asked questions
What is the current ratio formula?
Current ratio = current assets / current liabilities. CFI also calls it the working capital ratio.
What does a current ratio of 2 mean?
CFI says a ratio of 2 means the business can settle each dollar of loans or accounts payable twice. In its example, current assets of 60 million against current liabilities of 30 million give 2.0x.
What is a good current ratio?
CFI says a ratio above 1 suggests financial wellbeing, but there's no upper limit on too much because it depends on the industry. A very high ratio can mean cash is sitting unused.
Is the current ratio the same as cash?
No. CFI points out that it uses all current assets, including inventory and prepaid expenses, so it measures liquidity, not your actual cash position.
