Current ratio compares a company’s current assets to its current liabilities. It is one of six main calculations used to determine short-term liquidity—the ability of a company to pay its bills as they come due.
The calculation of current ratio is simple:
Current ratio = current assets / current liabilities
Most businesses work to maintain a current ratio between 1.70 and 2.0.
More about the current ratio
From the balance sheet excerpt below, ABC Co.’s current ratio would be:
$120,000 / $70,000 = 1.7
With a current ratio of 1.7:1, ABC Co. is in a healthy position to cover its current liabilities.