GLOSSARY // Fundamentals
Current Ratio
Divide current assets by current liabilities and you get the current ratio, the standard test of whether a company can cover the obligations due within the next year. Above 1.0, short-term assets exceed short-term bills; below 1.0, the company needs new cash coming in to pay what it already owes.
The comfortable zone is roughly 1.5-3.0 for most industries, but the benchmark is sector-dependent. Grocers and fast-food chains run below 1.0 all the time, because they sell inventory for cash within days and pay suppliers weeks later. A software company at 0.9 is a different conversation.
A very high ratio is not automatically good — cash and inventory piling up can mean management has no productive use for the capital.
A company holds $150M in cash, $200M in receivables, and $150M in inventory: $500M in current assets. Current liabilities are $250M. Current ratio = 500 / 250 = 2.0 — two dollars of near-term assets for every dollar of near-term obligations.
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Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.