Current ratio
Current ratio is a simple liquidity measure. It shows how many times your current assets cover your current liabilities. You calculate it as current assets divided by current liabilities.
How to read it: a result above 1 means you have more short‑term assets than short‑term debts; below 1 can signal pressure on cash. A very high ratio can point to excess stock or slow‑paying invoices. Compare your ratio over time and with businesses similar to yours.
Quick calculation
If current assets are £50,000 and current liabilities are £30,000, the current ratio is 50,000 ÷ 30,000 = 1.67. That means you have about 1.7 times more short‑term assets than short‑term debts.
What typically goes into the ratio:
- Current assets: cash and bank, customer invoices (debtors/receivables), inventory, short‑term investments, prepaid expenses.
- Current liabilities: supplier bills (creditors/payables), taxes and wages due, overdrafts and short‑term loans, accrued expenses, the current portion of long‑term loans.
