What does the current ratio tell us about a company's financial health?

What does the current ratio tell us about a company's financial health?

The current ratio measures a company's ability to pay short-term obligations with its current assets. A ratio above 1 indicates good financial health.

What is considered a healthy current ratio?

Generally, a current ratio between 1.5 and 2 is considered healthy, indicating that the company has enough assets to cover its liabilities.

What if the current ratio is below 1?

A current ratio below 1 suggests that a company may struggle to meet its short-term liabilities, which could be a red flag for investors.

How can a company improve its current ratio?

A company can improve its current ratio by increasing current assets, reducing current liabilities, or both. This can be done through better inventory management or collecting receivables faster.

Are there any limitations to using the current ratio?

Yes, the current ratio doesn't account for the quality of assets or the timing of cash flows, so it should be used alongside other financial metrics.