Current Ratio Calculator
Assess a company’s ability to pay short-term obligations. Measure liquidity and working capital health.
$
$
Include all assets and debts due within one year.
👨🏫
By Prof. David Anderson
Accounting Professor | CPA
"Students, imagine your company is a patient in the ER. The Current Ratio is its heartbeat. It answers one brutal question: 'Can this business survive the next 12 months?' In my 20 years of auditing, I've seen profitable companies go bankrupt simply because they ran out of cash. Conversely, I've seen companies with high ratios fail because their 'assets' were just piles of unsold inventory. Today, we don't just calculate a number; we perform a full Liquidity Diagnostic."
Current Ratio Calculator: Liquidity Analysis & The Liquidity Crisis Scenario
Working Capital Analysis: Current vs. Quick Ratio & The "Goldilocks Zone"
1. The Vital Signs: Current Ratio Formula
The Current Ratio (also known as the Working Capital Ratio) measures your ability to pay off short-term liabilities with short-term assets.
$$ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} $$
What goes into the buckets?
- Current Assets (Can be cash in < 1 yr): Cash, Accounts Receivable (invoices owed to you), Inventory, Marketable Securities.
- Current Liabilities (Must pay in < 1 yr): Accounts Payable (bills you owe), Short-term Loans, Accrued Expenses, Taxes Payable.
2. The "Goldilocks Zone": Interpreting Your Score
Unlike other metrics, "higher" is not always "better." You want to be in the healthy middle ground.
DANGER (< 1.0)
HEALTHY (1.5 - 2.0)
INEFFICIENT (> 3.0)
Insolvency Risk
Excess Cash/Inventory
- Below 1.0 (Red Zone): You have more debt due this year than assets to pay them. You are technically insolvent. Unless you can raise new capital, bankruptcy is a real risk.
- 1.5 to 2.0 (Green Zone): This is the Goldilocks Zone. You have a safety buffer ($1.50 or $2.00 for every $1.00 of debt), but you are also deploying capital efficiently.
- Above 3.0 (Yellow Zone): You are Inefficient. You are hoarding cash that should be invested, or worse, your warehouse is full of "Current Assets" (Inventory) that nobody wants to buy.
3. The Inventory Trap: Quick Ratio (Acid Test)
Warning: The Current Ratio lies. It assumes you can sell all your inventory tomorrow at full price. In a crisis, that never happens.
Enter the Quick Ratio (or Acid Test). It strips out inventory to show your true immediate liquidity.
$$ \text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}} $$
If your Current Ratio is 2.0 but your Quick Ratio is 0.5, you are not healthy. You are a warehouse full of unsold goods disguised as a solvent company.
4. Working Capital: The Dollar Amount
Ratios are percentages. Working Capital is real dollars. It represents the cash cushion you have to meet payroll and emergencies.
$$ \text{Working Capital} = \text{Current Assets} - \text{Current Liabilities} $$
Professor's Tip: Always track Working Capital trends. If it is shrinking month-over-month while revenue is growing, you are "Overtrading" and might face a cash crunch despite high sales.
5. The Liquidity Crisis Scenario: "The Bank Call"
🚨 Stress Test: Can You Survive?
Let's simulate a common disaster: The Bank freezes your Line of Credit.
Scenario: You have $100k Cash, $200k Accounts Receivable (AR), and $300k Inventory. You owe $400k in Payables.
- Current Ratio: ($600k / $400k) = 1.5x (Looks Safe).
- Reality Check:
• Inventory is frozen (nobody buying).
• Customers delay paying AR by 30 days.
• Immediate Cash Available: $100k.
• Bills Due Tomorrow: $400k.
Result: You default. Despite a "Healthy" 1.5 ratio, you are bankrupt because your assets weren't liquid enough. This is why we calculate the Quick Ratio alongside.
6. Industry Benchmarks
Context is everything. A supermarket (Retail) operates differently than a Consultant (Services).
| Industry | Avg. Current Ratio | Why? |
|---|---|---|
| Retail (Walmart) | 0.8 - 1.2 | Fast Cash Cycle. They sell inventory for cash daily but pay suppliers in 90 days. Low ratio is okay. |
| Technology (SaaS) | 2.0 - 4.0 | Cash Rich. Low debt, high cash reserves from VC funding or subscriptions. |
| Manufacturing | 1.5 - 2.5 | Slow Inventory. Needs a higher buffer because raw materials take time to convert to cash. |
7. Professor's FAQ Corner
Q: Can Current Ratio be TOO high?
Yes. If your ratio is 5.0, investors will ask why you are sitting on so much cash. Why aren't you investing in R&D, paying dividends, or acquiring competitors? It signals lazy management.
Q: What is the "Cash Ratio"?
The Cash Ratio is the most conservative metric. It excludes Inventory AND Accounts Receivable. Formula: (Cash + Marketable Securities) / Current Liabilities. It answers: "If we shut down today, can we pay our bills?"
Q: How can I improve my Current Ratio?
Two ways: 1) Pay down debt (reduces liabilities). 2) Convert short-term debt to long-term debt (moves it out of the "Current Liabilities" bucket).
References
- Investopedia. "Liquidity Ratios: Types and Their Importance".
- Corporate Finance Institute (CFI). "Current Ratio Formula & Interpretation".
- SEC.gov. "Beginners' Guide to Financial Statements".
Check Your Vital Signs
Don't wait for a crisis. Diagnose your liquidity health now.
Calculate Current Ratio