Successful investors buy stocks of companies that stay in business.

Duh!

Yet, you'd be surprised how often investors ignore financial ratios that paint a bleak picture of a company's ability to survive.

One useful ratio for measuring a company's financial strength is the current ratio. This ratio provides insight into the cash-generating ability of a firm.

To determine a company's current ratio, divide the company's current assets by its current liabilities. You can obtain both of these numbers from the company's balance sheet.

If a firm operates in a very stable industry, it can maintain a reasonably low current ratio, say below 1. However, if a company is involved in more capital-intensive businesses, you would like to see a current ratio higher than 1.

As is the case with any financial ratio, trends are usually more important than absolute numbers. For example, if you see a company where the current ratio is declining on a quarterly basis over the last two years, you should begin to ask yourself several questions:

• Is the company's business softening?
• Are profits not meeting expectations?
• Has the company's long-term debt level ramped up?
• Are competitors beating the company to the punch?
• Are sales trending lower?

Indeed, perhaps the best way to use a company's current ratio is as a potential red flag that the firm's financial position is deteriorating.

One final point is worth mentioning. It is often useful not only to look at the company's current ratio from quarter to quarter but also the firm's current ratio relative to its peers. A firm whose current ratio is dramatically lower than the rest of the companies in its industry could be one at a distinct financial disadvantage.