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Current ratio
Also called working capital ratio.
Current assets divided by current liabilities, a rough measure of whether a business can meet the obligations falling due in the next year.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
Current assets are cash, receivables, inventory and prepaid items expected to convert within twelve months. Current liabilities are payables, accrued expenses, the current portion of long-term debt, lines of credit and anything else due within twelve months. Above 1.0 means current assets nominally cover current obligations; below 1.0 means they do not.
Lenders use it as a liquidity screen and sometimes as a covenant, most often in bank and SBA credit agreements with a stated minimum tested quarterly or annually. The definitions in the credit agreement control the calculation, and they do not always follow standard accounting.
The ratio's weakness is that it treats all current assets as equally liquid. Inventory that takes six months to sell and receivables that are 120 days old count fully. The quick ratio, which excludes inventory and prepaid items, is a harsher and often more honest measure of whether next month's payables can be met.
Interpretation is industry-relative. A restaurant with almost no receivables and fast inventory turns operates safely at a level that would look distressed for a manufacturer, and a very high ratio can signal idle cash or uncollected receivables rather than strength.
Where this one catches people
Cash advances distort the ratio in a way that flatters the balance sheet. The advance proceeds land in cash, boosting current assets, while the obligation is often not recorded as a current liability at all, because the agreement is drafted as a sale rather than a loan and the treatment is unsettled. A business can show a healthy current ratio while committing most of next month's receipts to daily debits.
Worked through
Current assets 480,000, being 60,000 cash, 300,000 receivables and 120,000 inventory. Current liabilities 400,000. Current ratio is 1.20. Excluding inventory, the quick ratio is 360,000 / 400,000 = 0.90, so the business cannot cover near-term obligations without selling stock.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
Where you will meet this term
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Current ratio — common questions
What does current ratio mean?
Current assets divided by current liabilities, a rough measure of whether a business can meet the obligations falling due in the next year.
Where does current ratio catch people out?
Cash advances distort the ratio in a way that flatters the balance sheet. The advance proceeds land in cash, boosting current assets, while the obligation is often not recorded as a current liability at all, because the agreement is drafted as a sale rather than a loan and the treatment is unsettled. A business can show a healthy current ratio while committing most of next month's receipts to daily debits.
Is current ratio the same as an interest rate?
Current ratio is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does current ratio apply to?
Term Loan, Business Line of Credit, SBA Loan, Asset-Based Lending.
Is there a worked example of current ratio?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside current ratio?
Accounts receivable, Cash flow, Covenant, Debt service coverage ratio, Quick ratio.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.