Current ratio for the manufacturing industry (+examples)

If you are looking to find the best current ratio for the manufacturing industry, you have come to the right place.

In fact, the current ratio is one of the most important financial metrics in business.

And often, it is a core metric we use when determining the health of a manufacturer, and how they compare to the industry.

Current ratio for the manufacturing industry
Current ratio is a ratio between the current assets and current liabilities. This valuable metric can reveal if a manufacturer can pay its bills in the short term. The formula is current assets divided by current liabilities. 

In this article we will explain the current ratio, why it's important for the manufacturing industry, and provide some examples of the best manufacturing companies in the industry so that you can use these as benchmarks.

Let’s get started.

Current ratio for the manufacturing industry and why it is important

The formula for the current ratio is:

Current assets / Current liabilities

The current ratio is a vitally important metric to measure how well the manufacturing company is prepared to pay their bills (liabilities) in the short term. 

For example, if a manufacturing company has $1,000,000 in current assets and $1,000,000 in current liabilities, the current ratio equals 1.0.

Example 1: Current assets is $1,000,000 / Current liabilities is $1,000,000 = Current ratio 1.0

What’s a good current ratio for the manufacturing industry?

A good current ratio for the manufacturing industry is when the company has enough cash (current assets) to meet its short term obligations (current liabilities). 

A current ratio of 1.0 is a good starting point.

Anything over 1.0 is a great indicator. Anything less than 1.0 could be a potential concern.

As a general rule of thumb in the manufacturing industry, if the company sells inventory quickly, the current ratio can be lower (than 1.0) because there is a lot of available cash. 

But, if a manufacturer’s inventory sits longer or is faced with more relative unknowns in the future, the manufacturer’s current ratio needs to be higher. 

For example, if a manufacturing company has $5,000,000 in current assets and $1,000,000 in current liabilities, the current ratio equals 5.0.

Example 2: Current assets is $5,000,000 / Current liabilities is $1,000,000 = Current ratio 5.0

When a company is over a value of “1” they have a good handle on their ability to pay their short term obligations. 

Alternatively, if a manufacturing company has $1,000,000 in current assets and $5,000,000 in current liabilities, the current ratio equals 0.2.

Example 3: Current assets is $1,000,000 / Current liabilities is $5,000,000 = Current ratio 0.2.

In this example, the company could be facing a financial meltdown and probably needs to make some changes, quickly.

And when we say “short term”, this means within 12 months. Anything over 12 months is generally considered long term.

Short term obligations (liabilities) may include inventory, payroll, rent, utilities, tax liability, and advertising expenses.

For a very helpful article about current ratios and financial ratios in the food manufacturing industry, go here:

Food manufacturing financial ratios (Hormel vs Pepsi vs Nestle) 

Why the Current Ratio is important to the marketing department in a manufacturing company

As a professional marketer, the current ratio is a critical number to pay attention to because it directly influences:

• Your marketing department 
• Your marketing and advertising budgets, and 
• The size of your marketing team, among other important issues.

The current ratio is related to inventory management within a manufacturing company. For example, if you have ever managed an Amazon account for a manufacturing company, ran out of inventory during big campaigns or have not had enough inventory to ship to your most important auto-ship customers, you know exactly how important it is to properly manage your current liabilities.

This is one of the main reasons why I ask every company I work with what their current ratio is, as this immediately gives me a clue as to the strength of their manufacturing company and helps me determine some strategic steps.

And, coincidentally, if they have no idea what I am talking about this raises another really big red flag!

As a big take-away for this entire topic, the current ratio is a tool to help the company manage their cash.  And generally, most manufacturers measure this number against how other manufacturers are doing in the industry.  This exercise generally answers the question, “How much of our assets should we keep as available cash in order to meet our short term bills?”.

For a very helpful article on building a marketing department in a manufacturing company, see these two articles:

Building a Marketing Department for a Manufacturing Company (10 step guide)

Sales and Marketing Department in a Manufacturing Company

With that, there is a very important factor that largely dictates how much cash assets a manufacturing company should keep.

Generally, the more a manufacturer focuses on inventory turnover, the lower the current ratio. 

While a higher current ratio is usually a sign of a financially stronger company (think 5.0 versus 0.2 in our examples above), this isn’t always the case.

If a company keeps too much cash on hand and increases the current ratio (5.0+ for example), this is a sign that those assets could be better managed earning a higher return on assets (ROA) elsewhere. 

But, if the manufacturing company keeps too little cash assets on hand (0.2 for example), the company may have trouble paying its bills in the short term.

Let’s now look at some examples of manufacturing companies and how they manage their current ratio. You will find that current ratios vary among industries, but are usually in a similar range. This is because all great manufacturing companies, regardless of the industry, tend to have sound financial practices.

Current ratios of the best manufacturers in 12 different industries

The best way to get a handle on the current ratio for manufacturers in any industry, is to review the current ratios of the biggest companies in the world.

They may have a lot more zeros in their financial statements, but the important takeaway is the adherence of solid financial principles. 

This is why comparing ratios is important for benchmarking.

Below is a simple graph of 16 of the best manufactures in the world, and their current ratio. 

It is suggested that you benchmark as close to your industry as you can and then have the conversation with your leadership team on what makes the most sense for you.

Whether you have any control over the current ratio in your company is not important. What is important is to use this information as another tool in your tool-belt so you can make better decisions for your department and the company you work for.

Please note that these numbers are current as of the end of 2022. I will do my best to keep this information as current as I can but it does change. While the current ratio doesn’t fluctuate too much as core financial principles are fairly evergreen, things change for a variety of reasons.

Go here for more helpful strategies and information about building your marketing department.

Go here for more information and strategies if you are looking for Food Marketing strategies.