Current Ratio – Formula, Meaning & How to Calculate
Written by Pradnya Surana
3 min read | Updated on December 04, 2025, 16:22 IST
For any business, small or large, it is important to understand if its basic financials are healthy. If you are new to understanding the world of finance, too many ratios and financial jargon can be confusing.
To make it simple, one of the easiest tools to check the short-term financial strength of any business is the ‘current ratio’. It is a simple formula that shows whether a company in the short term can survive and how profitable it can be. Simply put, can a business pay its short-term bills using its short-term assets?
First things first,
What Is the Current Ratio?
The current ratio is a financial metric that tells you if a company has enough short-term assets to pay its short-term liabilities. The time frame of the ‘current’ is one year. So everything that will be used, sold or paid within one year.
In simple words, the current ratio answers the question,
‘Does the business have enough money, stock, or receivables to pay its short-term dues?’
If yes, the company is considered financially healthy for the short term.
Why the Current Ratio Matters
A healthy current ratio gives assurance to business owners, investors and even lenders. It shows that the business can tackle any surprise expenses, slow sales or payment delays and still survive without hassle.
If the current ratio is too low, the company may struggle to pay suppliers, salaries or EMIs (Equated Monthly Instalments).
If the ratio is too high, it may mean the business has too many idle assets. It is not using its assets to their full potential. For example, keeping too much stock or too much cash idle.
Formula for Current Ratio
The formula is very simple,
Current Ratio = Current Assets ÷ Current Liabilities
Current Assets include cash, bank balance, Inventory (stock), accounts receivable (money customers owe you) and short-term investments like fixed deposits or mutual funds.
Current Liabilities include accounts payable (money the business owes to suppliers), short-term loans, credit card dues, outstanding expenses, EMIs due within one year and any other immediate foreseeable expenses.
How to Calculate the Current Ratio (Indian Example)
Example 1 - Small business
A small shop has the following,
- Current assets of ₹6,00,000
- Current liabilities of ₹3,00,000
Using the formula,
Current ratio = 6,00,000 ÷ 3,00,000 = 2.0
This means the shop has ₹2 of current assets for every ₹1 of current liabilities. A ratio of 2.0 is generally considered strong.
Example 2- Medium-sized company
A manufacturing company has, Cash and bank- ₹5,00,000 Inventory- ₹8,00,000 Accounts receivable- ₹7,00,000 Total current assets = ₹20,00,000
Current liabilities,
Supplier payments pending- ₹6,00,000 Short-term loan- ₹4,00,000 EMIs due- ₹2,00,000
Total current liabilities = ₹12,00,000
Current ratio = 20,00,000 ÷ 12,00,000 = 1.67
This ratio of 1.67 shows that the company is in a comfortable short-term financial position.
What Is a Good Current Ratio?
While the ideal ratio varies across industries, a general guideline is-
- Less than 1.0- Risky — the business may face difficulty paying dues.
- 1.0 to 2.0- Healthy range for most Indian businesses.
- Above 2.0- Safe but may indicate inefficient use of assets (too much stock or idle cash).
The current ratio is one of the simplest and most useful ratios to check the financial stability of any business or venture. Comparing current assets and current liabilities shows whether a business can meet its short-term obligations without any pressure. Whether you run a small shop or a growing company, regularly checking your current ratio can help you improve cash flow, plan better and avoid financial trouble.
About Author
Pradnya Surana
Sub-Editor
is an engineering and management graduate with 12 years of experience in India’s leading banks. With a natural flair for writing and a passion for all things finance, she reinvented herself as a financial writer. Her work reflects her ability to view the industry from both sides of the table, the financial service provider and the consumer. Experience in fast paced consumer facing roles adds depth, clarity and relevance to her writing.
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Upstox is a leading Indian financial services company that offers online trading and investment services in stocks, commodities, currencies, mutual funds, and more. Founded in 2009 and headquartered in Mumbai, Upstox is backed by prominent investors including Ratan Tata, Tiger Global, and Kalaari Capital. It operates under RKSV Securities and is registered with SEBI, NSE, BSE, and other regulatory bodies, ensuring secure and compliant trading experiences.