Glossary
Current ratio
Definition
The current ratio is current assets divided by current liabilities. Above 1 means short-term assets cover short-term obligations; lenders often look for 1.2 to 2, depending on the industry, and use it in covenants.
How current ratio works
The quick ratio is stricter, excluding inventory.
A strong ratio built on slow receivables is weaker than it looks.
Why it matters to a firm
It's a lender's first check; helping owners manage it builds trust.
Questions about current ratio
What's a healthy ratio?
Often 1.2 to 2.
Do banks use it?
Yes, in covenants.
What's the quick ratio?
A stricter ratio excluding inventory.
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Related terms: Working capital
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