Financial metric · Debt and liquidity
Current Ratio and Quick Ratio
How many times assets that can turn into cash within a year cover liabilities due within a year. The quick ratio removes inventory, which is harder to sell quickly.
How to calculate it
Current ratio = current assets ÷ current liabilitiesQuick ratio = (cash + short-term investments + receivables) ÷ current liabilitiesWorking capital = current assets − current liabilitiesHow to read it
- Textbooks suggest a current ratio around 2 and a quick ratio around 1, but these are rough rules. What is healthy depends on the industry and business model.
- When the ratio falls, check whether current assets shrank (cash burn) or current liabilities grew (more short-term borrowing).
Common pitfalls
- A low current ratio is not always dangerous. Companies that collect from customers before paying suppliers, such as large retailers and subscription businesses, often run negative working capital, funded by others.
- A high ratio is not always safe: current assets may be dominated by slow receivables or unsellable inventory.
- Operating lease liabilities due within a year now sit in current liabilities, which lowers the current ratio for retailers and restaurants. This ratio is cruder than cash to short-term debt; use both.
Where to find it in a 10-K
Balance sheet: U.S. companies present total current assets and total current liabilities (banks and insurers do not classify their balance sheets this way).
U.S. vs. China reporting
The calculation is identical. A-share companies often hold bank acceptance bills and notes receivable in current assets, which are more liquid than ordinary receivables, while U.S. companies rarely do.