Current assets divided by current liabilities. Above 1 = company can pay its bills due in the next year. Graham's defensive minimum: 2.
Formula
Current Ratio = Current Assets / Current Liabilities
What it is
Current assets (cash, receivables, inventory) divided by current liabilities (payables, short-term debt, taxes due within 12 months). Measures the safety cushion for paying near-term obligations.
Graham's rule
Benjamin Graham (Buffett's teacher) demanded a current ratio of at least 2.0 for defensive investing. The logic: if a recession halved the company's short-term assets, it'd still cover its bills.
What "good" looks like
> 2.0: Graham-defensive, fortress balance sheet
1.5–2.0: solid, the level most quality businesses run at
1.0–1.5: workable, requires healthy cash flow to refinance
< 1.0: working-capital deficit - relies on continuous cash flow to stay solvent. Vulnerable in a credit crunch.
Sector context matters
Retailers (Walmart, Target) often run current ratios below 1.0 - they collect from customers in cash before paying suppliers, so the deficit is structural and benign. Software businesses (Microsoft, Adobe) often run far above 2 - they have minimal short-term obligations.