Current ratio

The current ratio divides current assets (cash, receivables, inventory, other assets convertible within twelve months) by current liabilities (payables, short-term debt, accrued expenses). It is the textbook short-term liquidity ratio. A ratio above 1.0 means the company can cover its near-term obligations from short-term resources alone; a ratio below 1.0 indicates reliance on operating cash flow or new financing to service near-term liabilities. Current-ratio interpretation varies by industry. Retailers and staples businesses run lean current ratios (0.8–1.2x) because their working-capital cycle is fast and well-understood; capital-intensive industrials and biotechs typically run higher ratios (1.5–3.0x) reflecting longer cash-conversion cycles and more lumpy capex. The quick ratio (current assets minus inventory, divided by current liabilities) is a stricter variant we use when inventory quality is questionable.