Current Ratio I. Liquidity ● live
The current ratio measures a company's ability to pay short-term debts using short-term assets — those convertible to cash within 12 months. It is one of the most fundamental liquidity indicators used by analysts, creditors, and investors worldwide.
A ratio of 1.0x means current assets exactly equal current liabilities. Above 1.0x provides a buffer; below 1.0x means the company cannot fully cover near-term obligations from current assets alone.
| Range | Signal | What it means |
|---|---|---|
| ≥ 1.5x | Strong | Solid liquidity. Company can comfortably meet short-term obligations. |
| 1.0x – 1.5x | Fair | Adequate but tight. Limited buffer against cash flow disruptions. |
| < 1.0x | Weak | Current liabilities exceed current assets. Potential liquidity stress. |
| > 3.0x | Review | Very high may indicate idle assets or poor capital allocation. |
Source: Damodaran Online, NYU Stern. Always compare within the same sector.
| Industry | Median | P25 | P75 |
|---|---|---|---|
| Technology | 1.80x | 1.30x | 2.60x |
| Consumer Goods | 1.40x | 1.00x | 2.00x |
| Healthcare | 2.00x | 1.40x | 2.80x |
| Energy | 1.20x | 0.90x | 1.70x |
| Financial Services | 1.10x | 0.90x | 1.40x |
| Telecommunications | 0.90x | 0.70x | 1.20x |
| Manufacturing | 1.50x | 1.10x | 2.10x |
| Retail | 1.20x | 0.90x | 1.60x |
| Company | Current Assets | Current Liabilities | Ratio | Signal |
|---|---|---|---|---|
| Large tech firm | 150,000 | 60,000 | 2.50x | Strong |
| Retail chain | 48,000 | 40,000 | 1.20x | Fair |
| Distressed mfr. | 22,000 | 35,000 | 0.63x | Weak |
| Equity Group FY2024* | 344,609m KES | 1,557,758m KES | 0.22x | Bank — use NIM/LCR |
* Banks are excluded from standard current ratio analysis. Deposits (current liabilities) fund long-term loans by design. Use NIM, LCR, and NPL ratio instead.
Is a higher current ratio always better?
Not necessarily. Above 3.0x may mean idle cash, overstocked inventory, or slow receivables. The ideal range for most industries is 1.5x – 2.5x.
Why do banks have low current ratios?
Banks use deposits (current liabilities) to fund long-term loans (non-current assets). This structural mismatch makes the current ratio meaningless for banks. Use the Liquidity Coverage Ratio (LCR) instead.
Current Ratio vs Quick Ratio?
The Quick Ratio excludes inventory — a stricter liquidity test. If current ratio is strong but quick ratio is weak, investigate inventory turnover efficiency.
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