Lesson 4 of 6
Two of Graham's tests fail here
The current ratio and the debt test, both halves of Graham's financial-condition rule, fail here beside ten years of positive free cash flow.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Both halves of Graham's financial-condition test, current ratio at 2.0 and long-term debt within net current assets, fail in all ten of Apple's filed years.
- A criterion published in 1973 could be calibrated to a market that no longer exists, or free cash flow could simply not be evidence against the risk it names.
- A criterion is a question to explain, not a verdict or a score.
Applied to Apple's ten filed fiscal years, Graham's current-ratio floor of 2.0 fails in every one. His industrial leverage test, long-term debt against net current assets, fails in every one too. Free cash flow was positive throughout, from 53.5 billion dollars in fiscal 2016 to 98.8 billion in fiscal 2025. The criteria are Graham's, from chapter 14 of The Intelligent Investor; the figures are Apple's own filed ones.
Where Graham's current-ratio floor sits among US companies today
Graham's floor, 2.0: between the median (1.86) and the 75th percentile (3.59).As a floor it admits between a quarter and a half of the cohort.
- 10th percentile: 0.69
- 25th percentile: 1.1
- median: 1.86
- 75th percentile: 3.59
- 90th percentile: 8.06
Where 2.0 sits today
Graham's 2.0 sits above the median of 1.86 and below the 75th percentile of 3.59, among 3,673 US companies measured on 2026-09-07. As a floor, it admits between a quarter and half of them. That is a fact about where the line falls, not a pass count.
What the ratio never held
A current ratio is two balances on one day the company chose, and it never carried three things. No maturity date: a liability due next week and one due in eleven months enter identically; the debt note carries the schedule. No undrawn facility: committed, undrawn credit sits off the balance sheet entirely, described only in words in the liquidity discussion. No business model: a company paid by customers before it pays suppliers runs current liabilities that are large and receivables that are small, and can sit below every published threshold in good health for its whole existence.
Why buybacks pull on both tests
A share repurchase paid in cash lowers current assets by the amount spent. That lowers the current ratio and net current assets together, the two figures behind Graham's financial-condition test. The two failures share this one mechanism; they are not two independent facts. Whether the cash was well spent is a different question, taken up in the return-on-equity lesson earlier in this course.
The leverage test, ten years
| Fiscal year | Net current assets $bn | Long-term debt $bn | Passes? |
|---|---|---|---|
| FY2016 | 27.9 | 75.4 | No |
| FY2017 | 27.8 | 97.2 | No |
| FY2018 | 14.5 | 93.7 | No |
| FY2019 | 57.1 | 91.8 | No |
| FY2020 | 38.3 | 98.7 | No |
| FY2021 | 9.4 | 109.1 | No |
| FY2022 | -18.6 | 99.0 | No |
| FY2023 | -1.7 | 95.3 | No |
| FY2024 | -23.4 | 85.8 | No |
| FY2025 | -17.7 | 78.3 | No |
Net current assets is current assets less current liabilities, from the same balance sheets behind the current ratio above. Long-term debt exceeds it in all ten years; in the last four, fiscal 2022 through 2025, net current assets had already turned negative before the comparison is even made.
The other six, and what a ten-year table can settle
Financial condition is checkable directly from this course's eight-row table, and it fails on both halves. Earnings stability is checkable too: net margin was positive in each of the ten years. Earnings growth is arithmetic on ten years of filed statements, as the prerequisite lesson notes, but it needs per-share earnings the eight rows do not carry, so it stays unrun here. The remaining three, adequate size and the two price multiples, cannot be run from any ten-year archive: size was set in 1973 dollars with no defensible modern equivalent, and the price multiples need a price this course's table does not carry. The dividend record needs twenty years of history, which no ten-year archive holds, and it is answered from a different record: since 11 September 2026 the streak is measured per share from declared dividends reaching back decades. Apple's run stood at 13 years on 2026-09-13, short of Graham's twenty, and it stops at a year with no regular dividend rather than at the edge of what we hold.
| Criterion | Checkable here? | Result for Apple |
|---|---|---|
| Strong financial condition | Yes | Fails on both halves |
| Earnings stability | Yes | Positive net margin, all ten years |
| Earnings growth | Arithmetic on filings, not from these eight rows | Not run |
| Dividend record | Not from these eight rows; from the declared-dividend record | 13-year run on 2026-09-13, short of his twenty |
| Adequate size | No modern equivalent to Graham's own floor | Not run |
| Moderate P/E | Needs a price | Not run |
| Moderate P/B | Needs a price | Not run |
Reporting that split is more useful than a score built from two tests and presented as a verdict.
Check yourself
Graham's current-ratio floor of 2.0 sits where in the 2026-09-07 US cohort?
- Below the 25th percentile
- Above the median, below the 75th percentile
- Above the 90th percentile
Show the answer
Answer: B.
The median was 1.86 and the 75th percentile 3.59, so as a floor 2.0 admits between a quarter and half of this cohort.What does a current ratio never contain, regardless of its level?
- The company's total current assets
- A maturity date for any of the liabilities counted
- The reporting currency
Show the answer
Answer: B.
Current assets and current liabilities are totals on one day. Whether an obligation falls due next week or in eleven months is not in the ratio; it is in the debt note.A company fails Graham's long-term-debt test while free cash flow stays strongly positive throughout. What does that mean on its own?
- The criterion is proven wrong
- The company is definitely carrying dangerous leverage
- Neither: it is a fact to explain by reading the filing, not a verdict either way
Show the answer
Answer: C.
A criterion is a question about a company. A failure means there is a mechanism to find and read, not that the test is invalid or that the company is unsound.Sources
- Graham, The Intelligent Investor, revised edition 1973, chapter 14, the defensive investor's seven criteria.
- Apple Inc., annual reports on Form 10-K, fiscal years 2016 through 2025, filed with the SEC (accession numbers in "Ten years in one table").
- Current ratio distribution of 3,673 US companies, built 2026-09-07 from filed statements, banks, equity REITs, insurers and mortgage REITs excluded.
What this leaves out
- The distribution above was built on 2026-09-07 and is rebuilt on a schedule; a later reader will see different breakpoints.
- The thresholds 2.0 and long-term debt within net current assets are Graham's own, published in 1973 and quoted with their source, not boundaries this product set.
- This lesson runs one criterion, in both its halves, and reaches no verdict on either the criterion or the company.
- Nothing here is a view on Apple or on any security, and none of it describes what any figure will do next.