Ataski
Start free

Financial metrics glossary

Current ratio: definition, formula and example

Current ratio is a liquidity ratio that compares what a company owns that turns into cash within a year with what it owes within a year. It is current assets divided by current liabilities, and a ratio above 1 means current assets exceed current liabilities.

Updated

Formula

  • Current ratio = Current assets ÷ Current liabilities
  • Quick ratio = (Cash + Receivables) ÷ Current liabilities

Worked example

Sample

SAMPLE · Northbridge Analytics, September 2026

Northbridge Analytics, the fictional software company in the Financial Analyst's public sample, at the end of September 2026. Cash, receivables and payables are the figures its report prints; the other lines come from the balance sheet of the same books:

Balance sheet line Month end
Operating Bank $1,454,443.68
Stripe Clearing $8,053.27
Accounts Receivable $194,800.00
Prepaid Expenses $8,100.00
Total current assets $1,665,396.95
Accounts Payable $46,465.97
Accrued Payroll $73,756.67
Accrued Commissions $2,724.00
Deferred Revenue $115,750.00
Total current liabilities $238,696.64
  1. Current ratio = $1,665,396.95 ÷ $238,696.64 = 6.98
  2. Quick ratio = ($1,454,443.68 + $194,800.00) ÷ $238,696.64 = 6.91

Current ratio: 6.98

Deferred revenue of $115,750 is an obligation to deliver subscriptions already paid for rather than a bill to pay; without it the ratio would be 13.55.

How to read it

  • A ratio of 1 means current assets exactly match current liabilities. Below 1, the obligations due within a year exceed the assets that turn into cash in that time.
  • Higher is not always better. A very high ratio can mean idle cash, slow-moving inventory or receivables that are not being collected.
  • The ratio treats every current asset as if it were cash. Inventory and old receivables can take a long time to turn into cash, or never do; the quick ratio leaves inventory and prepaid expenses out for that reason.
  • The ratio is a snapshot of one day's balance sheet. Paying a large bill or collecting a large invoice just before the period end changes it, so read it over several period ends.

How small US public companies compare (FY2025 10-Ks)

Median
2.08
Middle half
0.88 to 4.97
Companies
717

All industries, from Ataski's study of the fiscal 2025 annual reports (Form 10-K) that non-accelerated filers with revenue of $1 million to $250 million filed with the SEC: half the companies are above the median and half below, and the middle half fall within the range shown. These are small public companies, not private businesses, so read the figures as a reference point rather than a target.

Current ratio by industry, with the method →

Source: Ataski analysis of SEC Financial Statement Data Sets (FY2025 10-K filings).

Where it shows up in the monthly management report

The report does not print a current ratio. Its “Cash and working capital” page shows the largest inputs — cash, receivables and payables — with days sales outstanding and days payable outstanding.

  • Open the sample workspace — a fictional company's books, worked by the Financial Analyst, with its monthly report. No signup.
  • The Financial Analyst — what it reads from your accounting system, what the report contains and what it costs.

Frequently asked questions

What is a good current ratio?

Median 2.08 (middle half 0.88–4.97), 717 companies, FY2025 10-Ks: the current ratio of small US public companies, with revenue of $1 million to $250 million and outside finance, insurance and real estate. What is healthy depends on the industry and on how fast the business turns inventory and receivables into cash. Compare the ratio with your own history and with companies that have the same business model.

Source: Ataski analysis of SEC Financial Statement Data Sets (FY2025 10-K filings)

What is the difference between the current ratio and the quick ratio?

The quick ratio counts only cash, short-term investments and receivables, leaving out inventory and prepaid expenses. It asks whether short-term obligations could be met without selling stock.

Can the current ratio be too high?

Yes. A high ratio is safe in the short term, but it can mean cash sitting idle, too much inventory or customers who are slow to pay.