Written by Upstox Desk
5 min read | Updated on October 06, 2025, 16:29 IST
What Is Current Ratio?
What Are Current Assets?
What Are Current Liabilities?
Example To Understand Current Ratio:
Current Ratio vs. Other Liquidity Ratios
Significance Of Current Ratio
Limitations Of Current Ratio
What Is A Good Current Ratio?
Conclusion
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.
Current ratio or working ratio is the ability of a business to pay its short-term obligations that are due within a year. It measures the business' current assets against current liabilities. It is that liquidity ratio which gives investors and analysts an idea about the company's financial health– how it can maximize its current assets to meet its current debts and payables.
The following formula calculates the current ratio:
Current Ratio= Current Assets/Current Liabilities
Current Assets are the resources that can readily convert to liquid cash within a year. It includes:
Current liabilities are financial obligations and other payments due to suppliers and creditors within a year. It includes:
To understand with an example, let's calculate the current Ratio of Apple Inc. for the fiscal year 2017 using the current ratio formula discussed above. As given in their balance sheet:
Total Current Assets= $128.65 billion
Total Current Liabilities= $100.81 billion
Thus,
Current Ratio= 128.65/100.81=1.28
This result suggests that Apple had enough resources to meet its liabilities, indicating good financial health.
Other comparable liquidity ratios can also be used to find numbers that the current ratio analysis gives us. An investor can learn more about the current state of the company's assets and liabilities by understanding how these metrics evolve over time and differ in each scenario.
The most commonly used among these is the acid-test ratio. It contrasts a company's current obligations with its quickly liquidated assets, excluding inventories and prepaid expenses. Similarly, the cash-asset ratio, or cash ratio, simply evaluates a company's cash and marketable holdings in relation to its current liabilities. Another metric, the operational cash flow ratio, compares the company's active cash flow from operating activities (CFO) to its current liabilities.
Investors, creditors, and suppliers make decisions based on their understanding of the current ratio. Thus, the current ratio is crucial for determining whether a company's interest is viable.
The current ratio proves to be a very effective financial tool in measuring a firm's liquidity. Here are a few significant benefits of using the current ratio:
Among the many advantages of using the current ratio, you will have to be careful about the following drawbacks that this tool brings. Listed below are a few of them you are likely to come across.
The definition of a "good" current ratio is totally dependent on the environment of the sector in which a company's analysis takes place. For instance, retail businesses often have a high current ratio, whereas service sector businesses typically have low ratios.
A current ratio of less than 1 typically means that the company may only go bankrupt within a year if it grows its current cash flow to meet liabilities. On the other hand, a ratio of 1 can be seen as safe because it does not indicate any significant liquidity-related issues. Hence, a current ratio of more than 1 is generally preferable. The current ratio, however, is typically not an accurate picture of a company's short-term liquidity or longer-term solvency because it is only a snapshot at any given time.
In conclusion, the current ratio accurately indicates a firm's liquidity when combined with other strong financial indicators. Additionally, it makes it possible for investors, stockholders, and business owners to assess the company's financial situation and near-term prospects accurately. However, liquidity ratios alone should not be used to determine whether or not to invest in a company, and one should consider a person's age, income, capacity for danger, and financial objectives.
About Author
Upstox Desk
Upstox Desk
Team of expert writers dedicated to providing insightful and comprehensive coverage on stock markets, economic trends, commodities, business developments, and personal finance. With a passion for delivering valuable information, the team strives to keep readers informed about the latest trends and developments in the financial world.
Read more from Upstox