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Change in Current Ratios

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What does a change in a current ratio mean to you? What is a good current ratio and does a high current ratio always indicate good liquidity?

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Solution Summary

This solution is 398 words and discusses what the current ratio tells you and why. It interprets the ratio and indicates what a change in the ratio may signal. Examples are given.

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What does a change in a current ratio mean to you? What is a good current ratio and does a high current ratio always indicate good liquidity?

Ratios are like flashlights; they light up a section of the business and see if a rat is in the corner. Of course the flashlight is not the rat, but it allows you to see the rat. So, ratios are indicators of something going on in the business.

The current ratio is supposed to indicate if the firm has enough cash or near cash to pay its upcoming obligations (current liabilities). Usually, firms with a current ratio of between 1 and 2 can ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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