what is the current ratio 
the current ratio is a liquidity ratio that measures a company s ability to pay short term obligations or those due within one year it tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables a current ratio that is in line with the industry average or slightly higher is generally considered acceptable a current ratio that is lower than the industry average may indicate a higher risk of distress or default similarly if a company has a very high current ratio compared with its peer group it indicates that management may not be using its assets efficiently the current ratio is called current because unlike some other liquidity ratios it incorporates all current assets and current liabilities the current ratio is sometimes called the working capital ratio investopedia lara antalformula and calculation for the current ratioto calculate the ratio analysts compare a company s current assets to its current liabilities 1current assets listed on a company s balance sheet include cash accounts receivable inventory and other current assets oca that are expected to be liquidated or turned into cash in less than one year 2current liabilities include accounts payable wages taxes payable short term debts and the current portion of long term debt 3current ratio current assets current liabilities begin aligned text current ratio frac text current assets text current liabilities end aligned current ratio current liabilitiescurrent assets understanding the current ratiothe current ratio measures a company s ability to pay current or short term liabilities debts and payables with its current or short term assets such as cash inventory and receivables 1in many cases a company with a current ratio of less than 1 00 does not have the capital on hand to meet its short term obligations if they were all due at once while a current ratio greater than 1 00 indicates that the company has the financial resources to remain solvent in the short term however because the current ratio at any one time is just a snapshot it is usually not a complete representation of a company s short term liquidity or longer term solvency for example a company may have a very high current ratio but its accounts receivable may be very aged perhaps because its customers pay slowly which may be hidden in the current ratio some of the accounts receivable may even need to be written off analysts also must consider the quality of a company s other assets vs its obligations if the inventory is unable to be sold the current ratio may still look acceptable at one point in time even though the company may be headed for default public companies don t report their current ratio though all the information needed to calculate the ratio is contained in the company s financial statements interpreting the current ratioa ratio under 1 00 indicates that the company s debts due in a year or less are greater than its assets cash or other short term assets expected to be converted to cash within a year or less a current ratio of less than 1 00 may seem alarming although different situations can negatively affect the current ratio in a solid company for example a normal cycle for the company s collections and payment processes may lead to a high current ratio as payments are received but a low current ratio as those collections ebb calculating the current ratio at just one point in time could indicate that the company can t cover all of its current debts but it doesn t necessarily mean that it won t be able to when the payments are due additionally some companies especially larger retailers such as walmart have been able to negotiate much longer than average payment terms with their suppliers if a retailer doesn t offer credit to its customers this can show on its balance sheet as a high payables balance relative to its receivables balance large retailers can also minimize their inventory volume through an efficient supply chain which makes their current assets shrink against current liabilities resulting in a lower current ratio walmart s current ratio as of january 31 2023 was 0 82 4in theory the higher the current ratio the more capable a company is of paying its obligations because it has a larger proportion of short term asset value relative to the value of its short term liabilities however though a high ratio say more than 3 00 could indicate that the company can cover its current liabilities three times it also may indicate that it is not using its current assets efficiently securing financing very well or properly managing its working capital the current ratio can be a useful measure of a company s short term solvency when it is placed in the context of what has been historically normal for the company and its peer group it also offers more insight when calculated repeatedly over several periods 