In 30 seconds
- The current ratio divides current assets by current liabilities: whether what comes in within a year covers what falls due over that period.
- Coca-Cola had a ratio of 1.46 at the end of 2025 (31,044 divided by $21,281 million) and a quick ratio of 1.25.
- Supermarkets live below 1 because they collect up front and pay their suppliers later: Walmart ended fiscal 2026 at 0.79.
- A healthy ratio isn't enough if current assets are mostly inventory: Boeing was at 1.32 in 2024, with a quick ratio of 0.42.
Introduction
Walmart closed its fiscal year on January 31, 2026 with $84,874 million in current assets and $107,469 million in obligations due within a year. Current ratio: 0.79. A failing grade, according to plenty of textbooks. Boeing had ended 2024 at 1.32: a pass. Yet it was Boeing that had to raise $18.2 billion from shareholders in 2024 to keep going. Learn to read this ratio and you'll see why.
Explanation
The current ratio, sometimes called the working capital ratio, compares what a company holds or will collect within a year with what it has to pay over that same stretch. It answers a survival question: if suppliers, lenders and the IRS all showed up tomorrow to collect what's due this year, would the money be there?
Think about your own finances. You have $1,500 in your checking account, and your paycheck lands at the end of the month. This month the rent, the electric bill and the credit card are due: $1,200. Your "ratio" is comfortable. Now imagine half of that money isn't in the account at all, but tied up in furniture you're planning to sell on Facebook Marketplace. On paper, you cover the bills. In practice, it depends on someone buying your couch before the 1st.
What goes into each side
Current assets are what turns into cash within a year: cash, short-term investments, what customers owe the company (receivables) and inventory. Current liabilities are what comes due over that period: bills from suppliers, debt maturing this year, taxes, unpaid wages and money customers have already paid in advance. Both sit at the very top of the balance sheet. Subtract one from the other and you get working capital.
How to calculate it
Divide current assets by current liabilities. A ratio of 1.5 means $1.50 of current assets for every dollar due within a year. Its stricter sibling is the quick ratio, or acid test, which strips inventory out of the numerator, because selling inventory takes time and sometimes means cutting prices. And the most extreme version is the cash ratio, which counts only the cash on hand.
Why should you care as a shareholder? Banks look at this ratio before lending, and suppliers look at it before extending credit. A company that can't pay what's coming due has to raise money, and if it does that by issuing new shares, your stake gets diluted.
Formula
Current ratio = Current assets / Current liabilities
Current assets = cash + short-term investments + receivables + inventory + other assets due within a year
Current liabilities = accounts payable + debt due within a year + taxes and wages payable + other liabilities due within a year
Quick ratio (acid test) = (Current assets − Inventory) / Current liabilities
Working capital = Current assets − Current liabilities
Example
The table below shows the current ratio of four companies from very different sectors, using Kaplio's data: Walmart (retail), Coca-Cola (beverages), Microsoft (tech) and Caterpillar (heavy equipment). Read it as dollars of current assets for every dollar coming due within a year. Don't expect them all to sit at the same level; the sector calls the shots.
Step by step: Coca-Cola at the end of 2025 (10-K, in millions of dollars)
1. Current assets on December 31, 2025: 31,044.
2. Current liabilities: 21,281.
3. Current ratio = 31,044 / 21,281 = 1.46.
4. Inventory: 4,425. Quick ratio = (31,044 − 4,425) / 21,281 = 1.25.
A year earlier, at the end of 2024, the ratio was 1.03 (25,997 divided by 25,249). The business didn't change that much in twelve months; what changed were the items coming due that year. That's why it pays to look at several year-ends in a row.
Your turn. Caterpillar ended 2025 with $52,485 million in current assets, 36,558 in current liabilities and 18,135 in inventory. Work out its current ratio and its quick ratio.
Before you look at the answer: do you think Caterpillar passes the acid test? Answer: a current ratio of 1.44 and a quick ratio of 0.94. Without the machines sitting in the warehouse, it doesn't quite cover what comes due this year. That's normal for an industrial company, but it tells you how much it depends on selling that inventory.
Real-data example
| Company | Ticker | Current ratio |
|---|---|---|
| Walmart Inc. | WMT | 0.8 |
| The Coca-Cola Company | KO | 1.3 |
| Microsoft Corporation | MSFT | 1.2 |
| Caterpillar Inc. | CAT | 1.4 |
How to read it
How to read it
Above 1, current assets cover current liabilities; below 1, they don't. Beyond that, the sector changes everything. Rough thresholds:
| Sector | Weak | Normal | Comfortable |
|---|---|---|---|
| Industrials and consumer discretionary | below 1.2 | 1.2-1.5 | above 1.5 |
| Retail and supermarkets | below 0.6 | 0.6-1 | above 1 |
| Branded consumer staples | below 0.6 | 0.6-1.2 | above 1.2 |
| Cash-rich tech | below 1 | 1-2 | above 2 |
The sector guide on Kaplio's stock pages asks for more than 1.5 in consumer discretionary, because those companies have to ride out a recession when sales dry up. Benjamin Graham was stricter still: in "The Intelligent Investor" he told the defensive investor to look for industrial companies whose current assets were at least twice their current liabilities, a ratio of 2.
So why do supermarkets live below 1? Because they get paid in cash up front and pay their suppliers in 30 or 60 days. Walmart sells the milk before it pays the dairy for it: its suppliers are the ones financing its inventory. Its quick ratio is even lower: strip out its $58,851 million of inventory and it's 0.24. And that's fine, because that inventory turns over in weeks, not months. Costco, which also charges members an annual fee, ended fiscal 2025 on August 31 with a ratio of 1.03. Procter & Gamble ended fiscal 2026 on June 30 at 0.68, and its cash comes in every week with a regularity few companies can match. In a business like that, a low ratio is a sign of bargaining power, not distress. Banks and insurers don't use the ratio at all: their balance sheets don't split current from non-current items.
Pitfalls and limitations
1. Inventory isn't cash. A full warehouse lifts the ratio, but it only pays bills once it sells. If inventory makes up a big chunk of current assets, look at the quick ratio and at the lesson on inventory.
2. It's a one-day snapshot. The balance sheet closes on a specific date, and chasing customer payments or delaying bills right before year-end can dress it up. Compare several years.
3. Too high is a bad sign too. A ratio of 4 can mean idle cash earning nothing, or inventory that won't sell. Nvidia ended fiscal 2026 at 3.91, thanks to the cash it generates; at another company, the same figure could be a clogged warehouse.
4. A bond coming due. When a long-term loan enters its final year, it moves into current liabilities and the ratio drops sharply, even if the company will refinance it without trouble. Read the debt footnote before you panic.
Case in point: Boeing, a pass on paper
Boeing ended 2024 with $127,998 million in current assets against 97,078 in current liabilities: a current ratio of 1.32. But $87,550 million of those assets, 68%, was inventory, mostly half-built planes and jets waiting for delivery. Without it, the quick ratio fell to 0.42. That year Boeing lost $11,817 million, its operating cash flow was −$12,080 million, and it issued $18,200 million in new shares to shore up its cash. A 1.32 looked comfortable; the quick ratio and the cash told a different story. In 2025 the ratio slipped to 1.19 ($128,459 million against 108,115) and Boeing returned to profit, earning $2,235 million. The lesson isn't that Boeing was about to go under. It's that the 1.32 gave no warning of the risk, while the quick ratio and the cash did. Walmart, with its 0.79, was never in that position.
Practice on Kaplio
Frequently asked questions
What does the current ratio tell you?
It shows whether a company can cover the bills due over the next year with the assets it holds or will collect in that time. Divide current assets by current liabilities. Lenders check it before lending and suppliers before granting credit, and shareholders should too, since a cash crunch can end in new shares that dilute your stake.
What does a 1.5 current ratio mean?
It means the company has $1.50 of current assets for every dollar it owes within a year. For industrial and consumer discretionary companies, Kaplio's sector guide treats anything above 1.5 as comfortable. Check what those assets are made of, though: if most of it is inventory, the quick ratio can tell a very different story, as Boeing showed in 2024.
What if the current ratio is less than 1?
Then current liabilities exceed current assets: on paper, the company can't cover what's due within a year. That's a red flag for an industrial company but normal for supermarkets, which get paid in cash up front and pay suppliers in 30 to 60 days. Walmart ended fiscal 2026 at 0.79 without any liquidity trouble.
What is a good current ratio to have?
It depends on the sector. Industrial and consumer discretionary companies should be above 1.5, and Graham wanted 2 for industrials. For supermarkets and retailers, 0.6 to 1 is normal, because they collect cash up front and pay later. More than the exact number, look for a ratio that holds steady over several years and a quick ratio that doesn't collapse.