The current ratio is a quick way to see if a company has enough assets on hand to cover its short-term debts. The formula is the following:
Current ratio = Current assets / Current liabilities
For example, a current ratio of 2 means the company has $2 in current assets for every $1 in current liabilities, which generally signals a comfortable cushion to meet short-term financial obligations.
A healthy current ratio—typically between 1.5 and 3—suggests that a company has enough assets, like cash or inventory, to cover what it owes within the next year.Â
If the ratio falls below 1, it may suggest the company could struggle to pay off its short-term liabilities. On the other hand, an extremely high ratio (>3) could mean that the company isn’t efficiently using its assets to grow or improve profitability, as it may be holding too much cash or excess inventory​.
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