Current ratio
The current ratio is a company’s current assets divided by its current liabilities. BDC describes it as a calculation that shows a company’s ability to pay its short-term obligations, and it is read from the balance sheet.
The current ratio is current assets divided by current liabilities, both taken from the balance sheet. It can also appear in a loan agreement: BDC notes that loan covenants could require a borrower to maintain a set current ratio. The working capital in a business sale guide covers the related closing adjustment.
What it shows and what it does not
BDC says the ratio measures the ability to meet short-term financial commitments. BDC also describes the balance sheet as showing what a company owns and owes at the end of a period, so the ratio is a snapshot of one date. Earnings are not part of the calculation; for a measure that uses them, see the debt service coverage ratio.
What to check or ask
- Which balance sheet date the ratio is measured on.
- Whether the figures come from filed statements or from the seller’s adjusted numbers.
- How the lender defines current assets and current liabilities if the ratio becomes a covenant.
- How often the lender will test it.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Business Development Bank of CanadaGovernmentWhat is the Current Ratio
- 02Business Development Bank of CanadaGovernment4 types of financial ratios to assess your business performance
- 03Business Development Bank of CanadaGovernmentWhat are loan covenants?
- 04Business Development Bank of CanadaGovernmentWhat are financial statements?
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