What is the current ratio?
Current assets (cash, receivables, inventory, prepaid) divided by current liabilities (debt due within 12 months, payables, accrued expenses). The standard short-term liquidity signal.
Current ratio = current assets / current liabilities. A ratio of 1.0 means assets exactly cover near-term obligations; below 1.0 signals potential short-term stress; above 2.0 may signal idle capital that could be deployed more productively. Benjamin Graham's defensive criteria required a current ratio above 2.0 for safety; modern investors typically accept 1.5+ for capital-light businesses. Industries with negative working capital (Costco, McDonald's, Amazon historically) can run current ratios below 1.0 sustainably because their cash collection precedes their payable obligations.
Limitations and the quick ratio
The current ratio includes inventory in the numerator, which can be misleading if inventory is slow-moving or obsolete (electronics, fashion). The quick ratio (current assets minus inventory, divided by current liabilities) is a stricter version that excludes inventory and focuses on cash + receivables only. For inventory-heavy industries, the quick ratio is more informative.
How invest-like uses it
The current ratio is a soft signal in the Buffett-Fit financial-health pillar (above 1.5 contributes; below 1.0 detracts) and a hard signal in the Graham defensive-investor framework (above 2.0 required for full Graham pass). The Piotroski F-Score includes current-ratio improvement as one of its nine binary tests.
Frequently asked questions
What is the current ratio?
Current assets divided by current liabilities. Measures short-term liquidity.
What's a safe current ratio?
Above 1.5 for most businesses; Graham preferred above 2.0. Some negative-working-capital businesses (Costco) sustain below 1.0 because their cash collection precedes payables.
How does it differ from the quick ratio?
Quick ratio excludes inventory from the numerator, focusing on cash + receivables only. More informative for inventory-heavy industries.
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