What is current ratio?

Definition of current ratio

The current ratio, sometimes referred to as the ‘working capital ratio’, is a liquidity ratio that measures whether a business has enough resources to pay its short-term debts or debts due within one year. It shows how a company can maximise the current assets on its balance sheet to cover its current debt and other payables.

How to calculate the current ratio

The formula for calculating the current ratio is:

current ratio = current assets / current liabilities

A ratio of less than one suggests that the business is not in the best position to pay its debts. Between 1 and 3 suggests that the business has enough cash to pay its debts.

A significant decline in the current ratio from one period to the next may indicate liquidity issues. Comparing your ratio with competitors and the industry norms to can give you a good perspective on your own situation.

Business tips and news

If you check this box we'll include information and updates about Making Tax Digital along with your general business tips and news.

We’ll never share your details with third parties for their marketing purposes. For details on how we use customer information, see our General Privacy Notice. You can opt out of marketing emails any time by clicking on the unsubscribe link in the footer of any email.

Related Definitions

Are you an accountant or bookkeeper?

Find out more about FreeAgent for your practice.