Current ratio by industry

In financial analysis, the current ratio stands as a key metric, offering insights into a company's short-term liquidity and overall financial health. Calculated by dividing a company's current assets by its current liabilities, this ratio not only highlights a firm's ability to cover its short-term obligations with its short-term assets but also serves as a litmus test for financial stability.

The formula for calculating the current ratio is derived by dividing current assets by current liabilities.

Current ratio = Current Assets / Current Liabilities

For investors and analysts alike, understanding the current ratio is essential for gauging the immediate solvency of publicly traded companies across different industries.

Understanding the Current Ratio in Different Industries

The current ratio varies significantly across industries, reflecting the diverse operational and financial structures inherent to each sector. This variation underscores the importance of industry benchmarks in financial analysis, as what constitutes a healthy current ratio in one industry may signal financial distress in another. For instance, industries that operate with high inventory levels or longer receivable cycles might naturally exhibit higher current ratios, while those with quick turnover rates or lower capital requirements might show lower ratios.

Average Current Ratio by Industry

The average Current ratio varies significantly by industry. Here is a table showing average Current ratios by industries in the US as of May 2024:

Industry Average current ratio Number of companies
Advertising Agencies 1.53 22
Aerospace & Defense 2.56 49
Agricultural Inputs 2.27 11
Airlines 0.7 13
Apparel Manufacturing 2.04 17
Apparel Retail 1.67 28
Asset Management 2.77 72
Auto Manufacturers 1.43 15
Auto Parts 1.77 46
Auto & Truck Dealerships 1.31 14
Beverages - Non-Alcoholic 2.29 9
Beverages - Wineries & Distilleries 1.53 9
Biotechnology 5.35 497
Broadcasting 1.79 16
Building Materials 2.39 7
Building Products & Equipment 2.54 28
Business Equipment & Supplies 1.33 7
Capital Markets 1.81 33
Chemicals 2.63 17
Communication Equipment 2.07 51
Computer Hardware 2.62 28
Conglomerates 1.96 12
Consulting Services 1.48 16
Consumer Electronics 1.68 12
Credit Services 1.81 44
Department Stores 1.58 5
Diagnostics & Research 3.53 67
Discount Stores 1.24 9
Drug Manufacturers - General 1.24 12
Drug Manufacturers - Specialty & Generic 2.92 47
Education & Training Services 2.09 16
Electrical Equipment & Parts 2.42 42
Electronic Components 2.7 30
Electronic Gaming & Multimedia 3.26 7
Electronics & Computer Distribution 2.19 6
Engineering & Construction 1.48 30
Entertainment 1.05 37
Farm & Heavy Construction Machinery 2.28 22
Farm Products 1.61 18
Financial Data & Stock Exchanges 1.36 10
Food Distribution 1.68 9
Footwear & Accessories 2.38 11
Furnishings, Fixtures & Appliances 1.92 19
Gambling 1.66 10
Gold 2.32 27
Grocery Stores 1.33 10
Healthcare Plans 1.19 12
Health Information Services 2.95 31
Home Improvement Retail 1.43 7
Household & Personal Products 2.02 24
Industrial Distribution 2.44 17
Information Technology Services 1.83 53
Insurance Brokers 1.41 12
Integrated Freight & Logistics 1.79 15
Internet Content & Information 2.23 36
Internet Retail 1.62 22
Leisure 1.54 23
Lodging 0.65 9
Marine Shipping 1.62 23
Medical Care Facilities 2.1 39
Medical Devices 4.39 101
Medical Distribution 1.48 7
Medical Instruments & Supplies 4.65 45
Metal Fabrication 2.69 13
Oil & Gas Drilling 1.88 6
Oil & Gas E&P 1.1 64
Oil & Gas Equipment & Services 2.09 43
Oil & Gas Integrated 1.09 6
Oil & Gas Midstream 1.26 36
Oil & Gas Refining & Marketing 1.44 18
Other Industrial Metals & Mining 2.04 15
Other Precious Metals & Mining 2.82 12
Packaged Foods 2.09 42
Packaging & Containers 1.62 22
Paper & Paper Products 2.44 5
Personal Services 1.05 10
Pharmaceutical Retailers 1.08 8
Pollution & Treatment Controls 2.64 7
Publishing 0.94 7
Railroads 1.31 8
Real Estate Services 1.44 24
Recreational Vehicles 2.2 14
REIT - Specialty 1.04 15
Rental & Leasing Services 1.18 19
Resorts & Casinos 1.26 18
Restaurants 1.02 40
Scientific & Technical Instruments 2.42 24
Security & Protection Services 1.61 14
Semiconductor Equipment & Materials 3.49 26
Semiconductors 3 64
Software - Application 1.98 189
Software - Infrastructure 1.79 89
Solar 2.21 12
Specialty Business Services 1.71 25
Specialty Chemicals 2.38 45
Specialty Industrial Machinery 2.04 73
Specialty Retail 1.47 40
Staffing & Employment Services 1.88 23
Steel 3.04 15
Telecom Services 1.36 33
Textile Manufacturing 2.92 4
Thermal Coal 1.96 9
Tobacco 1.74 6
Tools & Accessories 2.32 11
Travel Services 0.93 13
Trucking 1.52 11
Utilities - Diversified 1.02 15
Utilities - Regulated Electric 0.93 26
Utilities - Regulated Gas 0.95 14
Utilities - Regulated Water 0.99 12
Utilities - Renewable 1.36 11
Waste Management 1.16 12

As shown in the table, the Biotechnology industry has the highest average Current ratio of 5.35, followed by Medical Instruments & Supplies at 4.65. In contrast, the Lodging industry has the lowest average Current ratio of 0.65, followed by the Airlines industry at 0.7. This variation is due to several factors, including industry-specific risks, turnover rates, and capital requirements.

Industries with highest Current Ratio

Industries with the highest Current ratio are shown in the following chart and table. You can filter the industries by sector in the chart below to see a breakdown of the top industries with the highest Current ratio for every sector.

Industry Average current ratio Number of companies
Biotechnology 5.35 497
Medical Instruments & Supplies 4.65 45
Medical Devices 4.39 101
Diagnostics & Research 3.53 67
Semiconductor Equipment & Materials 3.49 26
Electronic Gaming & Multimedia 3.26 7
Steel 3.04 15
Semiconductors 3 64
Health Information Services 2.95 31
Textile Manufacturing 2.92 4

Industries with lowest Current Ratio

The following chart and table present industries with the lowest current ratio. Within the chart below, you can also refine the industries by sector, allowing you to observe a breakdown of the top industries with the lowest Current ratio in each sector.

Industry Average current ratio Number of companies
Lodging 0.65 9
Airlines 0.7 13
Travel Services 0.93 13
Utilities - Regulated Electric 0.93 26
Publishing 0.94 7
Utilities - Regulated Gas 0.95 14
Utilities - Regulated Water 0.99 12
Restaurants 1.02 40
Utilities - Diversified 1.02 15
REIT - Specialty 1.04 15

Understanding the Current Ratio in Different Industries

The current ratio varies significantly across industries, reflecting the diverse operational and financial structures inherent to each sector. This variation underscores the importance of industry benchmarks in financial analysis, as what constitutes a healthy current ratio in one industry may signal financial distress in another. For instance, industries that operate with high inventory levels or longer receivable cycles might naturally exhibit higher current ratios, while those with quick turnover rates or lower capital requirements might show lower ratios.

Industry Analysis

Manufacturing: The manufacturing sector, known for its capital-intensive nature, often showcases higher current ratios. This reflects the necessity to maintain substantial inventory levels and manage receivables effectively to meet production demands and sales cycles.

Retail: Retailers typically maintain higher inventory levels to ensure product availability, influencing their current ratios. However, the sector's ability to quickly turn over inventory can mitigate the impact on liquidity, presenting a balanced view of its financial health.

Technology: With minimal physical inventory and rapid asset turnover, the technology sector often features lower current ratios. This reflects a streamlined operation that relies more on intangible assets and quick revenue generation.

Utilities: The utility sector usually exhibits lower current ratios, attributed to its stable cash flow and predictable operational expenses. The sector's reliance on long-term financing for infrastructure projects also impacts its current ratio.

Healthcare: Healthcare's financial dynamics, including insurance receivables and equipment investments, contribute to its current ratio. The sector must balance substantial assets against liabilities, including short-term obligations tied to operational needs.

Factors Influencing the Current Ratio

Several factors can influence the current ratio within industries, including:

  • Operational Cycles: The length of a company's operational cycle, from inventory purchase to sales realization, plays a significant role in determining its liquidity needs and, consequently, its current ratio.
  • Capital Structure: Industries relying more on short-term financing will have higher current liabilities, affecting their current ratios. Conversely, sectors utilizing long-term financing may show a more stable current ratio.
  • Seasonality: Seasonal variations in sales and inventory levels can lead to fluctuations in the current ratio, especially in sectors like retail and agriculture, where seasonal demand impacts operational dynamics.

Investment Insights from the Current Ratio

Investment Analysis: The current ratio aids investors in identifying companies with strong liquidity within industry contexts. A higher ratio may suggest financial stability, but industry norms must guide interpretation. For instance, a high ratio in manufacturing might indicate robustness, while in technology, lower ratios are common due to quicker asset turnover.

Limitations: The current ratio's utility is limited by its surface-level analysis. It doesn't reflect asset quality, cash flow timing, or long-term strategies. Investors should beware of high ratios padded by slow-moving inventory or non-liquid assets, emphasizing the need for a holistic analysis beyond just liquidity metrics.

The current ratio offers a snapshot of a company's short-term financial health, which is essential for liquidity analysis across industries. However, its interpretation requires context and complements from other financial metrics. Investors should remain vigilant to industry-specific dynamics and broader economic trends affecting liquidity measurements.