Balance sheet
Current Ratio
The current ratio checks whether short-term assets cover short-term obligations.
Current assets are cash, receivables, and inventory expected to turn within a year. Current liabilities are bills due within a year. A ratio above 1 means the balance sheet, on paper, can meet those bills without selling long-term assets. Far below 1 is a liquidity question. Far above 2 can mean idle cash or stale inventory.
The ratio is blunt. Inventory that nobody wants counts as an asset. Deferred revenue, which is often a good sign in software (customers paid in advance), counts as a liability and makes the ratio look worse. Read the components, especially for banks, where the current ratio is not the right liquidity tool.
Formula
Current ratio = current assets ÷ current liabilities
Live example
Apple Inc. (AAPL) last printed at $345.33 with a market cap of $5.04T. Apply the formula on this page to that live price. Where the quote is missing an input, the stock page's financials are the next place to read it.
Related
Debt to Equity · Interest Coverage · Free Cash Flow
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Questions
What number is safe?
Around 1.5 is a common comfort zone for industrial firms. The trend and the quality of the assets matter more than a round number.
How is the quick ratio different?
The quick ratio excludes inventory. It is the stricter test when stock on the shelf may not become cash quickly.