A company with a current ratio of less than 1.

00 does not, in many cases, have the capital on hand to

meet its short-term obligations if they were all due at once, while a current ratio greater than one
indicates the company has the financial resources to remain solvent in the short term. However,
because the current ratio at any one time is just a snapshot, it is usually not a complete representation
of a company’s short-term liquidity or longer-term solvency.

For example, a company may have a very high current ratio, but its accounts receivable may be very
aged, perhaps because its customers pay very slowly, which may be hidden in the current ratio. Analysts
must also consider the quality of a company’s other assets versus its obligations. If the inventory is
unable to be sold, the current ratio may still look acceptable at one point in time, even though the
company may be headed for default.

A current ratio of less than one may seem alarming, although different situations can affect the current
ratio in a solid company. For example, a normal monthly cycle for the company’s collections and
payment processes may lead to a high current ratio as payments are received, but a low current ratio as
those collections ebb.