Current Ratio

The Current Ratio measures a company's short-term liquidity by dividing current assets by current liabilities. It shows whether the company has enough short-term assets to cover obligations due within 12 months.

Formula

Current Ratio = Current Assets ÷ Current Liabilities

Current assets include cash, accounts receivable, inventory (convertible to cash within a year). Current liabilities include accounts payable, short-term debt, and accrued expenses.

Example

Apple (AAPL) has current assets of $120 billion and current liabilities of $105 billion, for a current ratio of 1.14. Walmart (WMT) has current assets of $60 billion and current liabilities of $70 billion, for a current ratio of 0.86.

How to Interpret It

• Current ratio > 1.0: The company has more current assets than current liabilities. It can pay short-term obligations.
• Current ratio 1.5-3.0: Healthy liquidity. The company has sufficient short-term resources and isn't too liquid (which could indicate poor asset management).
• Current ratio < 1.0: The company has more current liabilities than current assets. Potential liquidity concerns.
• Current ratio > 3.0: Excellent liquidity but potentially inefficient use of capital (cash could be invested or returned to shareholders).
• Industry variation: Retailers like Walmart often operate with ratios < 1.0 because inventory turns quickly; professional services might have 3.0+.

Limitations

• Current ratio doesn't account for inventory quality. Slow-moving inventory isn't as liquid as cash.
• Seasonal businesses have volatile current ratios that vary throughout the year; year-end ratios can be misleading.
• The ratio doesn't consider the timing of cash inflows and outflows (a company might have enough assets but not enough cash right now).
• Off-balance-sheet liabilities (operating leases, contingent obligations) aren't captured.

Related Terms

• Quick Ratio — a stricter liquidity measure excluding inventory
• Working Capital — current assets minus current liabilities
• Debt-to-Equity Ratio — another financial risk metric
• Liquidity — the ability to convert assets to cash quickly