What is Current Ratio?
The broadest short-term liquidity check - do current assets cover current liabilities?
Current Ratio: definition
The current ratio is the most common liquidity measure. It compares everything expected to turn to cash within a year - cash, receivables, inventory, prepaids - against everything owed within a year. A ratio of 2.0 means twice the current assets as current liabilities. Too low signals liquidity strain; too high can signal idle assets that could work harder.
Current ratio
Current Ratio = Current Assets ÷ Current Liabilities
It includes inventory and prepaids, so it is broader (and less conservative) than the quick ratio, which excludes them.
How Fintra handles it
Fintra computes the current ratio directly from the live balance sheet, so it reflects today position, not last quarter. Paired with the quick ratio and working-capital views, it gives an at-a-glance read on short-term health, with alerts if it dips below the threshold you set - useful for loan covenants that require a minimum current ratio.
- Current ratio computed live from current assets and liabilities
- Covenant thresholds monitored with alerts on breach risk
- Shown with quick ratio and working capital for full context
Worked example
Frequently asked questions
What is a good current ratio?
A current ratio between roughly 1.5 and 3.0 is often considered healthy - enough cushion to cover obligations without excessive idle assets. Below 1.0 means current liabilities exceed current assets, a potential liquidity concern. Ideal levels vary by industry.
What is the difference between current ratio and working capital?
Working capital is a dollar amount - current assets minus current liabilities. The current ratio is the same relationship as a ratio - current assets divided by current liabilities. The ratio makes comparisons across businesses of different sizes easier.
Can a current ratio be too high?
Yes - a very high ratio may indicate too much cash sitting idle, excess inventory, or uncollected receivables. It signals strong liquidity but possibly inefficient use of assets. The right level balances safety against putting capital to work.
Why do lenders care about the current ratio?
It signals whether a borrower can meet short-term obligations, so loan agreements often include a minimum current ratio covenant. Breaching it can trigger penalties or default, which is why Fintra monitors covenant thresholds and alerts before a breach.
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