Current Ratio

How to read it

The current ratio divides total current assets by total current liabilities, both taken from the balance sheet at the end of a quarter or a year. Current assets — cash, short-term investments, receivables and inventory — rise when the company collects cash, builds stock or raises money. Current liabilities — payables, short-term debt, accrued expenses and the part of long-term debt due soon — rise when it delays paying suppliers or borrows short term. A value above one means short-term assets exceed short-term obligations.

What is typical

The level a business needs depends on how quickly its cash turns over. Retailers and restaurants that sell for cash and pay suppliers later often run with a low ratio without strain, while manufacturers that hold large inventories and wait on customers carry a higher one. Compare a company with the median for the company’s sector.

Pitfalls

A high ratio is not always a strength: it can reflect unsold inventory or customers who are slow to pay. A low one can be a sign of efficient working capital rather than trouble. The figure is a snapshot on the balance-sheet date and can be moved by the timing of a payment. The current ratio also feeds the Piotroski F-Score, where a change in it counts as one signal.