Current Ratio
Current assets divided by current liabilities.
The current ratio measures whether a business has enough short-term assets to cover short-term liabilities. A ratio above 1.0 indicates more current assets than current liabilities. Most lenders want to see a current ratio of at least 1.2–2.0. A ratio that's too high may indicate excess cash or inventory that could be deployed more productively.
Formula
Current Ratio = Current Assets ÷ Current LiabilitiesExample
A business with $120,000 in current assets and $80,000 in current liabilities has a current ratio of 1.5, indicating a comfortable ability to cover short-term obligations.
Why It Matters for Your Business
Lenders examine the current ratio before approving loans—a ratio below 1.0 signals that the business may struggle to pay its upcoming bills.
Related Terms
More Business Terms
Accounts Reconciliation
Ensuring account balances match between different records.
Break-Even Point
The sales volume at which revenue equals costs.
Budget
A financial plan estimating income and expenses.
Financial Forecast
A prediction of future financial performance.
Capital Expenditure
Funds used to acquire or upgrade physical assets.
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