Glossary
Current Ratio
Whether short-term assets can cover short-term debt
The current ratio divides assets convertible to cash within a year by debts due within a year. It measures the ability to meet immediate obligations.
At 200% the company holds twice what it must repay; below 100% it holds less than what falls due. Even profitable companies can hit a funding crisis when this ratio breaks down.
This is where profitable bankruptcy comes from. Profit on paper means nothing if receivables do not arrive before payments are due, and the company stops. Profit and cash are different problems.
A high figure is not automatically good, though. An excessive current ratio can mean cash piling up instead of being invested — or inventory accumulating and inflating the number.
So the quick ratio, which excludes inventory, is read alongside it. Inventory becomes cash only if it sells, and it may not. A large gap between the two ratios signals inventory building up.