Current Ratio

The current ratio compares everything a company expects to convert to cash within twelve months (cash, receivables, inventory, prepaid expenses) against everything it must pay within twelve months (accounts payable, accrued liabilities, the current portion of long-term debt). A ratio above 1.0 means current assets exceed current liabilities; below 1.0 means the company would need to borrow, sell fixed assets, or stretch its vendors to meet obligations as they come due. For a credit manager, that second scenario matters directly, because the vendor being stretched is often you.

Interpretation is industry-dependent. Distributors and contractors typically run current ratios between 1.2 and 2.0. A grocery chain can operate safely below 1.0 because inventory turns to cash in days and suppliers finance the shelf. A ratio far above industry norms is not automatically good either; it can signal bloated inventory or uncollected receivables rather than genuine liquidity. Always read the ratio alongside the composition of current assets, since a 2.0 ratio built on stale inventory is weaker than a 1.3 ratio built on cash and current receivables.

The most useful signal is the trend. A current ratio that slides from 1.8 to 1.3 to 1.1 over three fiscal years tells you working capital is being consumed, usually by losses, growth outpacing financing, or owner distributions. In credit reviews, pair the current ratio with the quick ratio to see how much of the cushion depends on inventory actually selling.