- 1Current Ratio = Current Assets ÷ Current Liabilities
- 2Above 1.0 means more short-term assets than liabilities (good)
- 3Below 1.0 means potential liquidity problems (risky)
- 4"Good" range depends heavily on industry
- 5Too high (>3.0) can mean capital isn't being used efficiently
#What Is the Current Ratio?
The current ratio measures a company's ability to pay obligations due within the next 12 months. It divides current (short-term) assets by current (short-term) liabilities.
Current Ratio = Current Assets ÷ Current Liabilities
If a company has $50B in current assets and $30B in current liabilities, its current ratio is 1.67.
#What Counts as Current?
Current Assets (due within 12 months) - Cash and cash equivalents - Marketable securities - Accounts receivable - Inventory - Prepaid expenses
Current Liabilities (due within 12 months) - Accounts payable - Short-term debt - Current portion of long-term debt - Accrued expenses - Taxes payable
#Interpreting the Current Ratio
| Ratio | Interpretation |
|---|---|
| < 0.5 | Severe liquidity risk |
| 0.5–1.0 | Tight — may struggle to pay bills |
| 1.0–1.5 | Adequate — basic coverage |
| 1.5–2.0 | Healthy — comfortable buffer |
| 2.0–3.0 | Strong — very liquid |
| > 3.0 | Excess cash — may not be investing efficiently |
#Current Ratio by Industry
| Industry | Typical Range | Why |
|---|---|---|
| Software | 2.0–4.0+ | High cash, few physical assets |
| Retail | 1.0–1.5 | Inventory cycles, payable management |
| Utilities | 0.5–1.0 | Stable cash flows, managed leverage |
| Banking | N/A | Banks use different liquidity metrics |
| Manufacturing | 1.5–2.5 | Inventory and receivables |
#Related Liquidity Metrics
Quick Ratio (Acid Test)
(Current Assets - Inventory) ÷ Current Liabilities
More conservative — excludes inventory which may be hard to sell quickly.
Cash Ratio
Cash & Equivalents ÷ Current Liabilities
Most conservative — only counts cash on hand.
| Metric | Includes Inventory? | Includes Receivables? | Strictness |
|---|---|---|---|
| Current Ratio | ✅ | ✅ | Moderate |
| Quick Ratio | ❌ | ✅ | High |
| Cash Ratio | ❌ | ❌ | Very High |
#Red Flags
Declining Current Ratio
If the current ratio drops steadily over several quarters, the company may be building up short-term obligations faster than assets.
Current Ratio Below 1.0
The company cannot cover its near-term obligations with near-term assets. Not always fatal (some businesses operate this way intentionally) but requires investigation.
Inventory-Driven Ratio
If most of the current assets are inventory, the "liquidity" may be an illusion — inventory isn't cash until it sells.
#How We Use Stability Metrics
In our factor model, liquidity measures like the current ratio contribute to the Stability factor, alongside debt-to-equity and realized volatility. Companies with stronger balance sheets receive higher stability scores.
Last updated: February 5, 2026