What Is the Current Ratio?

The current ratio is a company's current assets divided by its current liabilities. It asks whether what the company will turn into cash within a year is enough to cover what it has to pay over the same period. A reading of 1.5 means there is a dollar and a half of current assets for every dollar of current liabilities.

How it's calculated#

Current ratio = Current assets / Current liabilities

Current assets are cash, short-term investments, receivables and inventory. Current liabilities are supplier invoices, taxes, wages and debt payments due within twelve months. Both totals are on the balance sheet. Subtract one from the other instead of dividing and you get working capital.

Say a company has $120 million of current assets and $100 million of current liabilities. The ratio is 1.2. If every creditor demanded payment at once and the company managed to sell all its current assets at book value, $20 million would be left over.

Where the rule of thumb comes from#

Accounting and credit-analysis textbooks commonly describe a current ratio of about 1.5 to 2 as comfortable. That is a working convention, not a regulatory threshold or the finding of a single study. It makes sense for a typical manufacturer with inventory and trade credit, and it works poorly wherever customers pay on the spot while suppliers wait. Below the range a company may struggle with day-to-day payments; well above it, the company may be holding more in current assets than it needs.

A real example#

At the end of its fiscal 2025, on September 27, 2025, Apple had $147.96 billion of current assets and $165.63 billion of current liabilities. Its current ratio was 0.89, compared with 0.87 a year earlier. By the textbook range, that is a company with a liquidity problem.

The same balance sheet also shows $77.72 billion of long-term marketable securities, excluded from current assets only because they mature in more than a year, and the company generated $111.48 billion of operating cash flow that year. The low ratio is a choice: Apple keeps little in current assets because it returns the rest of its cash through buybacks and dividends, and it pays suppliers later than customers pay it. The same 0.89 at a company without those cash flows would mean something entirely different.

How to read it#

The current ratio earns its keep in two uses. The first is the trend within one company: a fall from 1.8 to 1.1 over two years, with no change in the business model, deserves an explanation. The second is comparison with direct peers. Comparing a retailer with a machinery maker says nothing.

It also pays to look at what makes up the numerator. A ratio of 1.5 built mostly from cash is not the same as 1.5 built from inventory nobody wants to buy. That is why analysts calculate the quick ratio alongside it, leaving inventory out.

Related terms#

Working capital is the difference between the same two totals, stated in dollars. Free cash flow shows whether the company generates the cash to settle those obligations. A wider view of financial strength, including leverage and interest coverage, is in how to judge a company's financial health.