Introduction
At the end of its fiscal year in August 2026, Costco had $46.6 billion of current assets against $44.0 billion of current liabilities, a current ratio of 1.06. Home Depot's ratio at its year end was almost identical. Textbook rules of thumb would call both thin. Yet both companies generate billions of dollars of cash a year, and Costco's suppliers alone, with $22.6 billion of payables outstanding, were financing more than the $19.3 billion of inventory on its shelves, according to its 2026 annual report.
Liquidity ratios measure whether a company can meet obligations falling due within a year from the assets it expects to turn into cash in that time. They are easy to calculate and widely used, especially by lenders and credit analysts. They are also easy to misread, because what matters is not only how large the current assets are but how quickly they turn into cash, and how reliably the liabilities can be rolled over.
Three Ratios
The three standard ratios differ in which assets they count:
- The current ratio divides all current assets by current liabilities.
- The quick ratio, or acid-test ratio, counts only cash, short-term investments and receivables, leaving out inventory and prepaid expenses, which take longer to convert or cannot be converted at all.
- The cash ratio counts only cash and short-term investments.
Each is stricter than the last. A company whose current ratio is comfortable but whose quick ratio is low depends on selling its inventory to pay its bills; one with a low cash ratio depends on collecting receivables or borrowing.
- Quick ratio
Cash, cash equivalents, short-term investments and accounts receivable divided by current liabilities. Also called the acid-test ratio, it measures whether a company can meet its short-term obligations without relying on selling inventory.
Three large companies show how differently the ratios can read:
| Ratio | Costco | Home Depot | Microsoft |
|---|---|---|---|
| Current ratio | 1.06 | 1.06 | 1.23 |
| Quick ratio | 0.57 | 0.22 | 0.93 |
| Cash ratio | 0.48 | 0.04 | 0.46 |
The figures use each company's latest year-end balance sheet: Costco's at August 30, 2026, Home Depot's at February 1, 2026 from its fiscal 2025 10-K, and Microsoft's at June 30, 2026 from its fiscal 2026 10-K. Home Depot's low quick and cash ratios reflect a business that holds most of its current assets as inventory and keeps little cash, relying on its operating cash flow and its access to the commercial paper and bond markets.
All three ratios are snapshots of balances on one day, and balances can be managed around a year end, by delaying payments to suppliers or drawing on a credit line just before the reporting date. A useful complement is a flow measure: operating cash flow divided by current liabilities shows how much of the obligations falling due the business could cover from a year of its own cash generation. Home Depot's $16.3 billion of operating cash flow covered about half of its current liabilities, a cushion the balance sheet ratios do not show.
Why Low Ratios Can Be Healthy
The traditional rules of thumb, a current ratio above 1.5 or 2 and a quick ratio around 1, suit businesses with slow-moving inventory and receivables. Many strong businesses today run with ratios near or below one because of how their working capital works. Retailers like Costco collect cash from customers immediately and pay suppliers weeks later, so payables fund much of the inventory, the pattern described in accounts payable and accrued liabilities. Subscription and software businesses collect in advance: $73.0 billion of Microsoft's current liabilities were unearned revenue, obligations it will settle by delivering services rather than paying cash.
A low ratio is therefore a question, not a verdict. If it reflects fast-moving inventory, advance payments and strong supplier terms, it is a sign of an efficient business. If it reflects inventory that is not selling, overdue payables or short-term debt coming due without the cash to repay it, it is a warning.
What Lenders Look At Instead
Lenders and credit analysts use the ratios as a first screen and then move to measures closer to cash. Credit agreements for weaker borrowers often include a minimum liquidity covenant, defined as unrestricted cash plus undrawn availability under the revolving credit facility, rather than a current ratio test. Analysts compare that liquidity with the cash the company will burn or generate over the next year, and with its debt maturities, which are disclosed in the debt note.
Debt due within a year is the most important current liability to check. Home Depot had about $9.4 billion of short-term borrowings and current installments of long-term debt at its year end, routine for a company of its credit quality but a serious refinancing risk for one without it. The question the three ratios only approximate is whether cash on hand, the cash the business will generate and the credit still available cover everything falling due. Over a longer horizon the same question is answered by leverage and coverage ratios, and the swings in current assets and liabilities that drive it show up as working capital on the cash flow statement.
