Quick answer
The current ratio is current assets divided by current liabilities. It shows how many dollars of short-term assets a business has for every dollar of debts due within 12 months. A result of 1.5 means $1.50 of current assets for each $1 owed. Business Queensland suggests 1.5 to 2 suits most industries, but lenders read it alongside the industry, the trend and the quick ratio.
Key points
- Formula: current assets ÷ current liabilities
- Also called the working capital ratio
- Around 1.5 to 2 is a common guide, but cash-based industries often run lower
- Lenders check the quick ratio too, which leaves stock out
Of all the ratios a credit assessor might calculate from your accounts, this is usually the first and quickest. It takes two lines from the balance sheet, divides one by the other, and gives a rough sense of whether the business can pay what it owes over the coming year.
The formula
Current ratio = current assets ÷ current liabilities
A result of 2.0 means the business has $2 of cash, debtors, stock and other short-term assets for every $1 of debts due within 12 months. A result of 0.8 means it has 80 cents for every dollar owed.
Business Queensland’s ratio guide suggests a current ratio of 1.5 to 2 for most industries. It also notes that a ratio below 1 can limit opportunities, and that a very high ratio may mean surplus cash isn’t being put to good use.
The quick ratio is the stricter sibling. It removes stock before dividing: (current assets minus stock) ÷ current liabilities. The same guide suggests aiming for at least 1.0. For a business that carries a lot of inventory, the gap between the two ratios tells a lender how much it depends on selling stock to pay its bills.
Why the “right” number depends on the industry
A single benchmark misleads more than it helps. Compare three businesses:
| Business | Typical current ratio | Why |
|---|---|---|
| Café or restaurant | Often below 1 | Customers pay on the spot, so there are almost no debtors; stock is small and perishable; suppliers and the ATO are owed at any moment |
| Building contractor | Often 1.5 or higher | Large progress claims sit in debtors for 30 to 60 days; but those debtors can be slow or disputed |
| Wholesaler or retailer | Can look high | Lots of stock lifts the ratio; the quick ratio reveals the truer picture |
An experienced lender won’t decline a café for running at 0.7, because that’s normal for cash trade. They would worry about a builder at 0.7, because it suggests progress claims aren’t covering subcontractors. Context is everything.
What lenders actually do with it
The ratio is a screening tool, not a verdict. Assessors usually:
- Look at the trend. A ratio sliding from 1.6 to 1.1 over three years tells a different story from one that’s steady at 1.1.
- Adjust the inputs. They often remove loans to directors from current assets and discount old debtors and slow stock, which can pull the ratio down.
- Check the date. Balance sheets are a single day. A ratio struck on 30 June, after a big customer paid and before the BAS was due, can flatter the position.
- Pair it with serviceability. A low current ratio matters less if trading cash flow comfortably covers repayments, which is why the debt service coverage ratio often carries more weight.
You can test your own numbers, with and without stock, in our working capital ratio calculator.
Worked example: a landscaping business
A landscaping and turf company in Perth has $180,000 of current assets ($35,000 cash, $110,000 debtors, $35,000 stock and supplies) and $150,000 of current liabilities.
- Current ratio: $180,000 ÷ $150,000 = 1.2
- Quick ratio: ($180,000 − $35,000) ÷ $150,000 = 0.97
It sits a little below the usual guide, mainly because $60,000 of its liabilities is a short-term loan taken out to buy turf for a large council job. Once that job’s progress claims come in, debtors rise and the loan is repaid, and the ratio should recover. A lender seeing the contract and the payment schedule would read the 1.2 as a timing issue rather than a warning sign. That’s the kind of explanation worth putting in writing when you apply.
If the ratio looks weak only because cash is tied up in work you’ve already done, let us see whether that can be funded.
Related terms
- Liquidity: the broader idea the current ratio measures.
- Working capital: the dollar version of the same comparison.
- Debt-to-equity ratio: a longer term measure of how much the business relies on borrowing.
- Solvency: the ability to pay debts as and when they fall due.
Numbers a little tight on paper?
A thin current ratio doesn’t disqualify a business, but it does steer which lenders will look at it favourably. Some lend mainly on bank statement cash flow, some against debtors or property, and a few are comfortable working with businesses that are short on up-to-date financials.
You can tell us about your business in about a minute, and asking for help won’t show up on your credit report. We keep your enquiry with us instead of sending it to a crowd of lenders. Someone on our team reviews it personally and gives you a call, and honest figures in the form mean the option we suggest is far more likely to be the right one.
Frequently asked questions
What is a good current ratio?
Business Queensland suggests between 1.5 and 2 for most industries. Below 1 means short-term debts exceed short-term assets. A very high ratio, well above 2, can mean cash or stock is sitting idle rather than working for the business.
Is the current ratio the same as the working capital ratio?
Yes. The two names describe the same calculation. Working capital itself is the dollar figure, current assets minus current liabilities, while the ratio expresses the same relationship as a multiple.
What's the difference between the current ratio and the quick ratio?
The quick ratio, also called the acid-test ratio, removes stock from current assets before dividing. It shows whether the business could meet its short-term debts without having to sell inventory, which matters for retailers and wholesalers carrying a lot of stock.
Can I get a business loan with a current ratio below 1?
Often, yes. Many cafés, restaurants and fast-growing businesses run below 1 for long periods. Lenders look at why, whether cash flow covers repayments, and the trend over two or three years. Property security or strong bank statements can outweigh a weak ratio.
How can I improve my current ratio?
Collect debtors faster, clear slow stock, use profits to pay down short-term debts, or refinance short-term borrowing into a longer term loan so less of it falls due within 12 months.