What Is Current Ratio?

The current ratio is the simplest and most commonly used liquidity metric. By dividing current assets by current liabilities, it provides a quick assessment of whether a company has sufficient short-term resources to cover its near-term obligations.

The formula is: Current Ratio = Current Assets / Current Liabilities. A ratio of 1.5 means the company has £1.50 in current assets for every £1.00 in current liabilities.

While a ratio above 1.0 is generally considered healthy, the optimal level depends on the industry and business model. Manufacturing and distribution businesses with significant inventory typically have higher ratios (1.5-2.5). Service businesses with minimal inventory may operate comfortably at 1.0-1.5. Some businesses deliberately maintain ratios below 1.0 — supermarkets, for example, collect cash immediately but pay suppliers on 30-60 day terms.

The current ratio has a significant limitation: it treats all current assets equally. Inventory, which may take months to sell and convert to cash, is weighted the same as cash in the bank. This is why FP&A teams also monitor the quick ratio, which excludes inventory.

FP&A teams should forecast the current ratio as part of balance sheet planning, particularly when the business is growing (which typically requires more working capital) or when debt repayments are approaching. Covenant compliance often includes minimum current ratio requirements.

For UK businesses, the current ratio should be evaluated alongside the VAT return cycle and corporation tax payment dates, as these create periodic cash outflows that temporarily depress the ratio.