How do you calculate the current ratio?
The short answer
Current ratio = current assets ÷ current liabilities, both taken from the balance sheet at the month end.
A ratio of 1.5 means the business holds 1.50 of assets that should turn into cash within a year for every 1.00 it owes within a year. Below 1.0, short-term debts are larger than short-term assets.
Every figure shown here is invented for illustration. Nothing on this page is computed from anyone’s accounts.
£488,000 of current assets against £276,000 owed gives 1.77
From an invented September trial balance, mapped into balance sheet lines:
| Current assets | £ | Current liabilities | £ |
|---|---|---|---|
| Cash and bank | 142,000 | Trade creditors | 118,000 |
| Trade debtors | 236,000 | VAT payable | 41,000 |
| Stock | 96,000 | PAYE and NI payable | 22,000 |
| Prepayments | 14,000 | Accruals | 35,000 |
| Loan due within 12 months | 60,000 | ||
| Total | 488,000 | Total | 276,000 |
Current ratio = 488,000 ÷ 276,000 = 1.77
What counts as current is a mapping decision
- Current assets: cash, trade debtors, stock, prepayments, other debtors due within twelve months.
- Current liabilities: trade creditors, taxes payable, accruals, deferred income, overdrafts, and the part of any loan due within twelve months.
A trial balance doesn't label accounts as current, which is why the mapping matters. Classify each balance once, and move a loan's next twelve months into current liabilities when the lender's schedule changes.
The quick ratio leaves stock out
Stock can take months to sell, so the quick (acid-test) ratio leaves it out:
Quick ratio = (current assets − stock) ÷ current liabilities = (488,000 − 96,000) ÷ 276,000 = 1.42
Between 1.2 and 2 is typical, and below 1 is not always trouble
- Above 2: comfortable, though it can mean idle cash or slow stock.
- 1.2 to 2: typical for a healthy trading business.
- Below 1: watch closely. Some models live there safely: customers who pay before suppliers are paid, as in many restaurants and subscription businesses.
The business's own trend tells you more than a textbook number. A ratio that has fallen for three months is worth a question.
Why the ratio moves when nothing has gone wrong
- A loan entering its final year moves into current liabilities and drops the ratio overnight.
- A quarterly tax payment raises it in the month the liability is paid.
- Paying suppliers late keeps cash high but inflates creditors; read creditor days beside it.
Five ways the current ratio misleads
- The whole loan left as long term. Repayments due within twelve months are current.
- Director's loans counted as current assets with no realistic plan to repay them this year.
- Doubtful debtors at full value. Provide for what you don't expect to collect.
- An overdraft netted against a bank balance without a legal right of set-off.
- Comparing with a textbook 2.0. Compare with the business's own history.
Magic MIS computes it every month, the same way
Magic MIS computes the current ratio and the quick ratio from each month's trial balance, with every ledger classified once and kept that way, so the trend means something. Each figure opens to the ledgers behind it.
What people ask about the current ratio
Is a current ratio of 1 bad?
Not necessarily. It depends on how quickly customers pay compared with when suppliers and lenders must be paid.
Does an overdraft go in current liabilities?
Yes. An overdraft is repayable on demand.
Can it be calculated monthly?
Yes. It needs only balance sheet balances, which every month-end trial balance has.
Read next
- KPIs and ratios for a monthly MIS: formulas and what they tell youThe ratios a monthly MIS or management accounts pack should carry — margins, debtor, creditor and inventory days, cash conversion cycle, current and quick ratio — with formulas.Read
- How do you calculate creditor days?Creditor days = trade payables ÷ the last three months' credit purchases × their days. The formula, a worked example, what to use when purchases can't be separated, and traps.Read
- How do you calculate debtor days?Debtor days = trade receivables ÷ the last three months' revenue × the days in them. A worked example, why three months beats one or twelve, and the GST effect nobody mentions.Read
Have the current ratio computed from your trial balance
Create an account, load last month's trial balance, and get the report — paid per action.
Prepaid credits, no subscription.