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.