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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Current ratio

What is the current ratio, and what does a lender read into it?

ONE OF 416 TERMS · FREE · NO SIGNUP

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

The current ratio is current assets divided by current liabilities: whether what a business expects to turn into cash within a year covers what it must pay within a year. A business with US$9m of current assets and US$6m of current liabilities has a ratio of 1.5 times. A lender reads what sits inside it: slow stock and old debtors swell the top, an overdraft repayable on demand or a term loan reclassified after a covenant breach swells the bottom, and one balance sheet date can be dressed. A retailer paid in cash before it pays suppliers may run below 1.0 times by design.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// THE FULL PAGE

Current Ratio: a Worked Example →

Two lists drawn on one date, and only one of them is certain.

// WHAT IT IS NOT

Liquidity headroom counts cash and undrawn committed lines at the forecast low point; the current ratio compares balance sheet assets and liabilities on one date, including some that will not turn into cash in time.

// WORKED IN

// NEXT TO IT

READING THE NUMBERS

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