The current ratio is one of the most widely used liquidity metrics in financial analysis. It answers a simple question: if all short-term debts came due today, could the business pay them using only its current assets?
What Counts as Current Assets?
Current assets are assets expected to convert to cash within 12 months: - Cash and cash equivalents - Short-term investments (marketable securities) - Accounts receivable - Inventory - Prepaid expenses
What Counts as Current Liabilities?
Current liabilities are obligations due within 12 months: - Accounts payable - Short-term debt and current portion of long-term debt - Accrued expenses - Deferred revenue (current portion) - Taxes payable
Current Ratio Benchmarks
| Ratio | Interpretation |
|---|---|
| > 2.0× | Strong — may signal excess idle cash |
| 1.5–2.0× | Healthy — standard target for most businesses |
| 1.0–1.5× | Adequate — limited buffer for disruptions |
| < 1.0× | Liquidity risk — liabilities exceed current assets |
Industry Variations
Retail businesses typically hold more inventory (lower quality current assets) and need a higher current ratio to compensate. SaaS companies with subscription billing and minimal inventory can operate safely with a current ratio below 1.5×.