The current ratio is a simple liquidity measure calculated by dividing a company's current assets by its current liabilities. Current assets include cash, trade debtors, stock, and other items expected to convert to cash within twelve months. Current liabilities include trade creditors, short-term borrowing, and other obligations due within twelve months.
Current ratio = current assets ÷ current liabilities
What the number tells you
A ratio above 1.0 means the company has more short-term assets than short-term liabilities — a positive sign of near-term liquidity. A ratio below 1.0 suggests current liabilities exceed current assets, which may indicate a cash-flow strain unless the company has reliable credit facilities or very fast debtor collection. There is no single universally correct ratio; norms vary significantly by industry and business model.
Current ratio versus quick ratio
The current ratio includes stock in its calculation. The quick ratio (sometimes called the acid-test ratio) strips stock out, giving a more conservative view of liquidity. For businesses where stock takes a long time to convert to cash — manufacturers, for example — the quick ratio is often more telling.
How lenders use the current ratio
When assessing a Credicorp facility application, our team looks at liquidity metrics including the current ratio alongside revenue, profit margins, and cash-flow trends. A healthy current ratio relative to the size of the facility requested supports a positive credit decision.
We lend only to UK limited companies and LLPs, and the loan is to the company with no director personal guarantee. As business finance outside the consumer-credit regime, it is not covered by the Financial Ombudsman Service or FSCS.
See also: What is the quick ratio and how is it different from current ratio?, What does EBITDA mean in business finance?, What does company solvency mean and why does it matter?.