The current ratio tells you whether a company has enough short-term assets to pay its short-term bills. It is the most common liquidity check in stock analysis. In this guide you will learn the current ratio formula, a good level, the quick ratio, working capital and a worked example, all in simple words.
Educational content only. This is not investment advice. All company figures below are hypothetical.
Key Takeaways
- Current ratio = Current assets ÷ Current liabilities.
- Above 1 means assets are enough to cover bills due within a year.
- The quick ratio removes inventory for a stricter test.
- Too high a ratio can also mean idle cash or unsold stock.
What Is the Current Ratio?
Current assets are things a company expects to turn into cash within a year: cash, receivables and inventory. Current liabilities are bills due within a year: supplier dues, short-term loans and expenses. The ratio compares the two. It is like checking whether the money in your wallet and bank can cover this year’s bills.
Current Ratio Formula
Current Ratio = Current Assets ÷ Current Liabilities
Worked Example
| Item (₹ crore) | Value |
|---|---|
| Current assets | 600 |
| Inventory (part of current assets) | 250 |
| Current liabilities | 400 |
| Current ratio | 600 ÷ 400 = 1.5 |
| Quick ratio | (600 − 250) ÷ 400 = 0.875 |
| Working capital | 600 − 400 = 200 |
The company has ₹1.50 of current assets for every ₹1 of current bills. But if inventory cannot be sold quickly, the quick ratio of 0.875 shows a tighter position.
Quick Ratio and Working Capital
- Quick ratio = (Current assets − Inventory) ÷ Current liabilities. It ignores stock because stock can be slow to sell.
- Working capital = Current assets − Current liabilities. Positive means a cushion; negative means pressure.
What Is a Good Current Ratio?
| Current ratio | General reading |
|---|---|
| Below 1 | Possible cash stress |
| 1 to 1.5 | Acceptable |
| 1.5 to 3 | Comfortable |
| Above 3 | Very safe, but check for idle cash or slow stock |
Supermarkets and FMCG companies often run below 1 and still do well, because they sell fast and collect cash before paying suppliers. Manufacturers usually need more.
How to Use It Step by Step
- Take current assets and current liabilities from the balance sheet.
- Calculate the current and quick ratio.
- Look at the 5-year trend.
- Check how much of current assets is inventory and receivables.
- Compare with industry peers and check cash flow.
Pros and Cons
| Pros | Cons |
|---|---|
| Quick check of short-term safety | Inventory may not sell at book value |
| Easy to find and compare | A snapshot on one date |
| Warns of cash stress early | Industry norms differ widely |
FAQs
What is a good current ratio?
Between 1.5 and 3 is generally comfortable, but it depends on the industry.
Is a current ratio below 1 bad?
Not always. Fast-selling businesses can run below 1. Check cash flow before judging.
What is the difference between current and quick ratio?
The quick ratio removes inventory, so it is a stricter test of liquidity.
Can a current ratio be too high?
Yes. It may mean idle cash, slow-moving stock or uncollected payments.
Where can I find the numbers?
On the balance sheet in filings at BSE or NSE.
Conclusion
The current ratio is a simple way to see if a company can pay its near-term bills. Read it with the quick ratio, debt-to-equity and cash flow. Continue with our fundamental analysis of stocks guide. For daily institutional flow figures, see the FII and DII data home page.
Disclaimer: Educational only, not investment advice. Figures are hypothetical. Verify data from official filings. Sources: NSE, BSE, Zerodha Varsity.
