Good and Bad Values for Current Ratio
Good sign: roughly 1.5 to 3. The company’s in pretty good shape, for now. You’ll get paid. (The Wikipedia article says, “Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses.”)
Warning sign: about 1.2 or lower. The company is facing some short-term problems in paying its debts. Your salary might be at risk. (The HBR blog says, “If it’s below 1.2, that’s a big red flag.”)
Warning sign: higher than 3. This might indicate an organization that’s just sitting on its money instead of putting it to good use.
As they say, your mileage may vary. Whatever the current ratio is, keep in mind that it’s a snapshot, a moment in time. The company’s fortunes could turn one way or the other. The company could weather a current storm, or it could snatch defeat from the jaws of victory. The current ratio is a hint, something for you to discuss with a prospective employer. Compare the ratios for similar organizations to see if one stands out as especially better or worse than the others.
Finding the Information (in the US)
Publicly traded company: Do a web search for “balance sheet” and the company’s name or stock ticker symbol. You should be able to find the current balance sheet online. Look for Total Current Assets and Total Current Liabilities, and then do the math: (total current assets) / (total current liabilities).
Non-profit organization: Search for the organization at http://www.guidestar.org/ and look at the organization’s latest Form 990. You’ll need to register a free Guidestar account to see the Form 990. On the Form 990, get the Total Assets and Total Liabilities in Part I – Summary, and then do the math: (total assets) / (total liabilities).
To be precise, this calculation for non-profits isn’t really the current ratio. The total assets and liabilities cover current items (short-term, within the next 12 months) as well as long-term items. If you look on the Form 990 at Part X – Balance Sheet, you’ll find more detail, but it doesn’t distinguish which items are current or long-term. A single line item could mix both together, like investments. Also, Guidestar warns that Ratios Aren’t the Last Word on non-profits, because they don’t tell you which organizations are well-managed or mismanaged, or which ones are fulfilling their missions well or poorly.
Private company: You may have to ask the company for its latest audited balance sheet. I mention “audited” in particular because that will be the latest official balance sheet, verified by an independent auditor. If the company hands you unaudited numbers, the info might not yet be accurate and complete. I’m not saying the company is dishonest, but I know from experience that the audited numbers aren’t necessarily the same as the preliminary unaudited numbers.
Let’s try a few…
Microsoft (stock ticker symbol MSFT): A web search quickly finds the latest Microsoft balance sheet. As of June 29, 2012, it shows Total Current Assets = $85,084,000 and Total Current Liabilities = $32,688,000. Microsoft’s current ratio is 2.6. As a prospective employer, Microsoft should be in good shape for issuing paychecks.
Apple (AAPL): The Apple balance sheet, as of September 29, 2012, shows Total Current Assets = $57,653,000 and Total Current Liabilities = $38,542,000. Apple’s current ratio is 1.5. Apple seems to be in decent shape for issuing paychecks.
Wal-Mart (WMT): The Wal-Mart balance sheet says that as of January 30, 2012, Total Current Assets = $54,975,000 and Total Current Liabilities = $62,300,000. Wal-Mart’s current ratio is 0.9. Ruh-roh! Is Wal-Mart at risk of not paying employees? How does it stack up against similar companies? If you’re looking at Wal-Mart as a prospective employer, this bears further exploration.
Feed the Children (nonprofit): The 2011 Form 990 found at Guidestar shows Total Assets = $185,587,243 and Total Liabilities = $9,072,846. As I said above, we’re not computing the current ratio because the Form 990 doesn’t distinguish current from long-term. If we compute the ratio of assets to liabilities anyway, we get a ratio of 20.5. That seems very high, but it’s also not really the current ratio. Let’s drill down into Part X – Balance Sheet. I’ll guess that lines 1-9 are current assets, and I’ll leave out lines 10-15 – $112,650,766 in current assets. I’ll guess that lines 17-22 are current liabilities, and I’ll leave out lines 23-25 – $8,298,371 in current liabilities. Result: estimated current ratio = 13.6. That still seems pretty high. On its own, as Guidestar warns, it doesn’t prove anything, but it gives me something to explore and consider. I’d want to compare similar organizations to see if their ratios are also that high.
PricewaterhouseCoopers (privately held): I wasn’t able to find a PwC balance sheet online, but this is no surprise because private companies aren’t required to publish that information. If I were looking at PwC as a prospective employer, I’d have to ask for their latest audited balance sheet if I wanted to compute a current ratio or otherwise see how they were doing financially.
Calculate the current ratio of prospective employers, and maybe you’ll get a constructive dialog out of it.