What is Current Ratio?
Current Ratio measures if a company can pay short-term obligations with short-term assets. Above 1 means more current assets than current liabilities.
Think of it like this
Your monthly bills are $3,000. You have $4,500 in checking/savings. Your current ratio is 1.5 - you can cover bills with cushion left over!
Formula
Current Ratio = Current Assets / Current Liabilities- Current Assets: Cash + assets convertible to cash within 1 year
- Current Liabilities: Bills due within 1 year
Why it matters
- Shows short-term financial health
- Can company pay its bills?
- Important for suppliers and creditors
- Red flag if below 1
What's a good value?
< 1.0
Risky
May struggle to pay bills
1.0-1.5
Adequate
Can cover obligations
1.5-3.0
Healthy
Good financial cushion
> 3.0
Very Safe
Lots of liquidity, but might be inefficient
Real-world example
Amazon current ratio: 1.1 - operates efficiently with low inventory. Apple: 1.0 - just-in-time operations. Struggling retailer: 0.7 - may miss payments.
Things to watch out for
- Inventory might not be liquid
- Quality of receivables matters
- Too high might mean inefficiency
- Industry norms vary significantly
Screen US stocks by Current Ratio in the app, and see which companies pass right now.