The current ratio: a quick liquidity check
Current Ratio = Current Assets / Current Liabilities
The Current Ratio compares what you can convert to cash within a year (current assets) against what you owe within a year (current liabilities). Worked example: a company with $300M of current assets and $200M of current liabilities has a current ratio of 1.50. A ratio of 1.0 means current assets exactly cover current liabilities; below 1.0 is a warning sign. The full mechanics — Quick Ratio, Cash Ratio, Interest Coverage — live in rat-4 'Liquidity Ratios: Can They Pay Their Bills?'.
Liquidity is not the same as solvency
These are different concepts, and conflating them is the single most common student error. Solvency asks whether total assets exceed total liabilities (do you have a positive net worth?). Liquidity asks whether you can pay this month's bills from cash and near-cash resources. A company can be solvent (net worth positive — assets exceed debts overall) but illiquid (can't pay this month's bills). Lehman Brothers held over $600B in assets at the time of its September 2008 bankruptcy filing — solvent on paper, fatally illiquid in practice because nobody would lend against its collateral overnight any more.
Calculate a real company's current ratio
Pitfall: liquidity can vanish in a crisis
Markets that work fine in normal times can lock up overnight when everyone needs cash at once. The March 2020 Treasury market dislocation made even on-the-run Treasuries trade with bid-ask spreads 5-10x normal — until the Federal Reserve intervened. The March 2023 Silicon Valley Bank run liquefied $42B of deposits in 48 hours, eliminating the bank's working liquidity while its asset side remained marketable but rate-locked. Concentration in assets that are normally liquid is a hidden risk. For the full treatment of liquidity ratios and the interest-coverage extension into solvency-adjacent territory, see rat-4 'Liquidity Ratios: Can They Pay Their Bills?'.
Sit with the ideas.
Crestwood Logistics reports $480M in current assets (including $80M of cash, $200M of receivables, and $200M of inventory) against $600M in current liabilities. Total assets are $1.8B and total liabilities are $900M (so net worth is positive $900M). What is Crestwood's current ratio, and what does the combination of figures tell you about its liquidity vs solvency?