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Current Ratio (MRQ)

Current Ratio (MRQ)

Current ratio compares current assets to current liabilities. Values above 1 mean the company has more short-term assets than short-term obligations, which generally signals better liquidity.

How it relates

Total Current AssetsTotal current assets includes cash and other assets that are expected to be turned into cash within a year, like receivables and inventory. It is a key part of the company's short-term financial strength.÷Total Current LiabilitiesTotal current liabilities are obligations that must be paid within a year, such as supplier bills, short-term debt and taxes due. They are important for understanding short-term pressure on cash.=Current Ratio (MRQ)

Where it fits

Current Ratio (MRQ)→Liquidity
Current Ratio (MRQ)→Financial Strength

The current ratio measures a company's ability to pay short-term obligations using short-term assets. As the most widely used liquidity metric, it compares current assets (expected to convert to cash within one year) to current liabilities (due within one year). The result indicates whether a company has sufficient liquid resources to meet near-term obligations without distress.

The formula is straightforward:

Current Ratio = Current Assets / Current Liabilities

For example, if a company has $500 million in current assets and $300 million in current liabilities, its current ratio is 1.67. For every $1 of short-term debt, the company has $1.67 in short-term assets.

Interpreting current ratio levels:

  • < 1.0: Current liabilities exceed current assets; potential liquidity stress unless company has strong cash flow or credit access
  • 1.0-1.5: Adequate liquidity for many businesses, especially those with predictable cash flows
  • 1.5-2.0: Comfortable buffer; traditional "safe" range
  • 2.0-3.0: Strong liquidity; may indicate conservative management
  • > 3.0: Very high; possibly inefficient use of assets unless industry-specific reasons

Industry context matters significantly:

  • Retailers: Often operate with ratios near 1.0 due to inventory financing
  • Utilities: Lower ratios acceptable given predictable revenues
  • Tech companies: Higher ratios common due to cash hoards and minimal inventory
  • Manufacturing: Typically 1.5-2.5 due to inventory and receivables cycles

Important limitations:

  • Asset quality ignored: Slow-moving inventory or uncollectable receivables inflate the ratio falsely
  • Timing issues: Snapshot at quarter-end may not reflect typical conditions
  • Off-balance-sheet items: Some obligations not captured in current liabilities

Complement current ratio analysis with the quick ratio (excludes inventory) and cash ratio (cash only vs. liabilities) for a complete liquidity picture. Track trends over time—a declining current ratio may signal developing liquidity problems even if the absolute level remains acceptable.