The current ratio compares what a company expects to turn into cash within a year with what it must pay within a year.
Formula
current ratio = current assets / current liabilities
Both are as reported, on the same balance sheet date. See current assets and current liabilities.
Reading it
- A ratio above 1 means current assets exceed current liabilities.
- Higher is not always better. A very high ratio can mean cash or inventory is sitting idle.
- Lower is not always worse. Businesses that collect from customers before they pay suppliers, such as many retailers and subscription companies, can run comfortably below 1.
- Current assets include inventory, which may take time to sell or be worth less than its book value.
When it says "not reported"
Banks, insurers and some other financial companies present an unclassified balance sheet, with no split between current and non-current items, so neither figure exists. The ratio is also not shown when either figure is missing or current liabilities are zero.