Why it matters
A lender or a vendor may look at the current ratio before extending credit. A ratio below 1 means the current liabilities are larger than the current assets, which can signal a cash squeeze even when the business is profitable.
Example
A client has $300,000 of current assets and $150,000 of current liabilities. The current ratio is 2.0, meaning the business has two dollars of short-term resources for every dollar of short-term bills.
Related terms
Questions about Current ratio
What is a good current ratio?
It depends on the industry and the business. A ratio above 1 is generally healthier, but a very high ratio can also mean cash is sitting idle or inventory is not moving.
Does the current ratio use the same accounts as working capital?
Yes. Working capital is current assets minus current liabilities, and the current ratio is current assets divided by current liabilities. They describe the same short-term position in different ways.