Current ratio measure
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Hi could you please assist me with these 2 questions?
1. If you are just looking at the 2.15 current ratio for one company does not provide a clear enough picture. What if the industry average is 4.0 and then what does that tells us about the company?
2. From a liquidity stand point, is it better to put a large amount of cash down to purchase a long term asset or is it better to utilize a loan?
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Solution Summary
Current ratio measures are examined. The liquidity stand point is determined.
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1. If the industry has an average current ratio of 4 and the company only has 2.15, this tells us that the company is not liquid enough. Remember that current ratio = (current asset - inventory)/current liability, so if the current ratio is low, this means that either the company as too little current asset, or too much short term debt. In any of the two cases, this company is more likely to ...
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