Can anyone explain to me how the current ratio fails to capture components of current assets?
The current ratio provides no information on the quality of the current assets. Not all current assets are created equal. For example, is the inventory reported on the balance sheet really liquid?
Other drawbacks of this ratio:
It would not be comparable if firms use different inventory valuation methods.
It can vary significantly over time. It may be high on the balance sheet date but low in the remainder of the year. However, this would be true for any balance sheet ratio.
BullishBear Finance
Further, the current ratio when Cash = 100 and Inventory = 1 is the same as when Cash = 1 and Inventory = 100: the current ratio doesn’t discriminate on the relative liquidity of its components.