Nonprofit Accounting Basics

Ratios: Current Ratio

Note: Articles published before January 1, 2017 may be out of date. We are in the process of updating this content.

This ratio tells you how many times current (within 12 months) assets could cover current liabilities. A value of 1 or better indicates that current liabilities could be covered by current assets. The basic formula for this ratio is:

                  Current Assets ÷ Current Liabilities

Signal:  Positive is better than negative; upward trend is good, 3 to 5 range is good, although over 5 may indicate that current assets may not be used most strategically; downward trend may be cause for concern.

Calculation:  Receivables due over twelve months in the future are considered long-term and should be excluded from the current assets amount. Similarly, portions of liabilities that are not due within twelve months should be excluded from the current liabilities amount.

Caveat:  This ratio is a snapshot of one moment in time and may be most reliable in trend.