The Current Ratio Formula: How to Calculate It Step by Step

The formula

Current ratio = total current assets / total current liabilities. Both figures come from the same balance sheet date.

Written out:

Current ratio = Current assets ÷ Current liabilities

The result is a plain number, such as 1.8. It means that for every $1 of obligations due within a year, you hold $1.80 of assets expected to turn to cash within a year. Use totals from one balance sheet date so assets and liabilities match in time. For what the result means in practice, see the current ratio overview.

Step one: add up current assets

Include cash, accounts receivable, inventory, short-term investments and prepaid expenses that will be used or converted within 12 months.

Pull these from the asset section of your balance sheet:

• Cash and cash equivalents, including checking, savings and money market accounts
• Accounts receivable, net of any amounts you do not expect to collect
• Inventory at cost
• Short-term investments that can be sold quickly
• Prepaid expenses, such as insurance paid ahead

Do not include equipment, vehicles, buildings or long-term investments. Those are fixed assets. If you are unsure how an account is classified, ask your bookkeeper. Our assets, liabilities and equity guide explains the categories.

Step two: add up current liabilities

Include accounts payable, accrued expenses, taxes owed, short-term debt and the part of long-term debt due in the next 12 months.

From the liability section, gather:

• Accounts payable owed to suppliers
• Accrued wages, payroll taxes and other expenses
• Sales tax and income tax payable
• Credit card balances and lines of credit due in the year
• Customer deposits or deferred revenue you have to deliver on
• The current portion of long-term debt, meaning principal payments due within 12 months

A common mistake is leaving out the current portion of a term loan. If you owe $4,000 a month in principal on a loan, then $48,000 belongs here, even though the loan itself is long-term.

Step three: divide, with two examples

Divide the asset total by the liability total. Two examples below show a healthy and a weak result.

Both examples are illustrative.

The landscaper divides $65,000 by $37,000 for 1.76. The retailer divides $55,000 by $62,000 for 0.89. The retailer holds enough stock but owes more in the next year than it has in current assets, and most of those assets are inventory. It needs the stock to sell.

Related checks: quick ratio and working capital

The quick ratio excludes inventory. Working capital is current assets minus current liabilities, expressed in dollars.

Calculate these alongside the current ratio:

• Working capital = current assets minus current liabilities. The landscaper has $28,000. The retailer has negative $7,000.
• Quick ratio = (cash + receivables) divided by current liabilities. The retailer's quick ratio is $10,000 / $62,000, about 0.16, a much starker view.

The quick ratio is covered in the acid test ratio guide. Together, the three show whether your near-term position is solid or thin.

Common calculation errors

Mixing dates, misclassifying loans, counting bad receivables and ignoring accrued liabilities are the usual mistakes.

1. Mismatched dates. Using assets from one month and liabilities from another.
2. Counting uncollectible receivables. Write off old invoices you do not expect to be paid.
3. Overvaluing inventory. Stale or damaged goods may be worth far less than cost.
4. Leaving out accruals. Wages earned but not yet paid and taxes due are liabilities.
5. Misplacing owner loans. A loan from the owner due on demand may belong in current liabilities.

If your books are not current, fix them first. Reliable ratios depend on reliable records, as explained in closing the books.

Using the result when you seek funding

A weak ratio often points to a timing or inventory issue. Funding can help if it fixes the cause and the payback is clear.

If the ratio is low because cash is tied up in inventory or receivables, the right move may be collecting faster or reducing stock, not borrowing. If the ratio is low because you are repeatedly covering gaps with short-term debt, restructuring into longer-term financing can lower current liabilities and improve the picture.

ROI Funder reviews bank statements rather than ratio calculations for most files, and starts from the payback of the plan. Options include term loans with fixed payments and a business line of credit. Eligibility starts at 500+ FICO, 6+ months in business and $20,000+ monthly revenue.