Current Ratio
The Current Ratio measures a company's ability to meet its short-term obligations using its short-term assets, calculated by dividing current assets by current liabilities.
Current assets include cash, trade receivables, short-term investments, and inventories — assets that are expected to be converted into cash within one year. Current liabilities include trade payables, short-term borrowings, and other obligations due within the same period. A current ratio above 1 means the company has more short-term assets than short-term liabilities, suggesting adequate liquidity.
A ratio of 1.5 to 2.0 is widely considered healthy for manufacturing companies in India, though sector norms differ. A retail company with fast-moving inventory and strong cash collections (like DMart, which operated on a largely cash-and-carry model with minimal receivables) could operate efficiently with a lower current ratio than a capital goods manufacturer that extended long credit terms to customers and held large raw material and work-in-progress stocks.
Very high current ratios are not always positive signals. A ratio of 4 or 5 might indicate that capital is being tied up inefficiently in excess inventory or slow-moving receivables. For example, an infrastructure contractor with mounting receivables from delayed government payments would show a high current ratio on paper, but the quality of those assets — and the time to realise them — may be poor. The receivables ageing schedule in the annual report notes is critical context here.
The current ratio became a focal point during the NBFC liquidity crisis of 2018–2019. Several shadow lenders had borrowed short-term (via commercial paper) to fund long-term loans (a classic asset-liability mismatch). When the short-term funding market seized up post-IL&FS, these NBFCs struggled to refinance their current liabilities despite showing current ratios that appeared adequate on paper, because their 'current assets' (loan portfolios) could not be liquidated quickly.
For Indian retail investors, checking the current ratio trend over 3–5 years is more valuable than a single-year snapshot. A steadily declining current ratio alongside rising short-term debt and stagnant or falling sales can be an early warning of deteriorating financial health before it manifests in headlines.