what makes the current ratio good or bad often depends on how it is changing a company that seems to have an acceptable current ratio could be trending toward a situation in which it will struggle to pay its bills conversely a company that may appear to be struggling now could be making good progress toward a healthier current ratio 
in the first case the trend of the current ratio over time would be expected to harm the company s valuation meanwhile an improving current ratio could indicate an opportunity to invest in an undervalued stock amid a turnaround imagine two companies with a current ratio of 1 00 today based on the trend of the current ratio in the following table for which would analysts likely have more optimistic expectations two things should be apparent in the trend of horn co vs claws inc first the trend for claws is negative which means further investigation is prudent perhaps it is taking on too much debt or its cash balance is being depleted either of which could be a solvency issue if it worsens the trend for horn co is positive which could indicate better collections faster inventory turnover or that the company has been able to pay down debt the second factor is that claws current ratio has been more volatile jumping from 1 35 to 1 05 in a single year which could indicate increased operational risk and a likely drag on the company s value example using the current ratioin its q4 2022 fiscal results apple inc reported total current assets of 135 4 billion slightly higher than its total current assets at the end of the last fiscal year of 134 8 billion however the company s liability composition significantly changed from 2021 to 2022 at the 2022 the company reported 154 0 billion of current liabilities almost 29 billion greater than current liabilities from the prior period 5for 2021 apple had more current assets than current liabilities its current ratio was 134 836b 125 481b 1 075 this means that if all current liabilities of apple were immediately due the company could pay all of its bills without leveraging long term assets at the end of 2022 it was a slightly different story apple s current ratio was 135 405b 153 982b 0 88 this means that apple technically did not have enough current assets on hand to pay all of its short term bills analysts may not be concerned due to apple s ability to churn through production sell inventory or secure short term financing with its 217 billion of non current assets pledged as collateral for instance current ratio vs other liquidity ratiosother similar liquidity ratios can supplement a current ratio analysis in each case the differences in these measures can help an investor understand the current status of the company s assets and liabilities from different angles as well as how those accounts are changing over time the commonly used acid test ratio or quick ratio compares a company s easily liquidated assets including cash accounts receivable and short term investments excluding inventory and prepaid expenses to its current liabilities the cash asset ratio or cash ratio also is similar to the current ratio but it only compares a company s marketable securities and cash to its current liabilities 6companies may use days sales outstanding to better understand how long it takes for a company to collect payments after credit sales have been made while the current ratio looks at the liquidity of the company overall the days sales outstanding metric calculates liquidity specifically to how well a company collects outstanding accounts receivables finally the operating cash flow ratio compares a company s active cash flow from operating activities cfo to its current liabilities 6 this allows a company to better gauge funding capabilities by omitting implications created by accounting entries the current ratio is most useful when measured over time compared against a competitor or compared against a benchmark limitations of using the current ratioone limitation of the current ratio emerges when using it to compare different companies with one another businesses differ substantially among industries comparing the current ratios of companies across different industries may not lead to productive insight for example in one industry it may be more typical to extend credit to clients for 90 days or longer while in another industry short term collections are more critical ironically the industry that extends more credit actually may have a superficially stronger current ratio because its current assets would be higher it is usually more useful to compare companies within the same industry another drawback of using the current ratio briefly mentioned above involves its lack of specificity unlike many other liquidity ratios it incorporates all of a company s current assets even those that cannot be easily liquidated for example imagine two companies that both have a current ratio of 0 80 at the end of the last quarter on the surface this may look equivalent but the quality and liquidity of those assets may be very different as shown in the following breakdown in this example company a has much more inventory than company b which will be harder to turn into cash in the short term perhaps this inventory is overstocked or unwanted which eventually may reduce its value on the balance sheet company b has more cash which is the most liquid asset and more accounts receivable which could be collected more quickly than liquidating inventory although the total value of current assets matches company b is in a more liquid solvent position the current liabilities of company a and company b are also very different company a has more accounts payable while company b has a greater amount in short term notes payable this would be worth more investigation because it is likely that the accounts payable will have to be paid before the entire balance of the notes payable account company a also has fewer wages payable which is the liability most likely to be paid in the short term in this example although both companies seem similar company b is likely in a more liquid and solvent position an investor can dig deeper into the details of a current ratio comparison by evaluating other liquidity ratios that are more narrowly focused than the current ratio 