Question
In: Finance
2. A. How would you interpret a current ratio of 0.8? B. Is it good or...
2. A. How would you interpret a current ratio of 0.8?
B. Is it good or bad for the firm?
C. What information you would need to extra to interpret it?
Solutions
Expert Solution
Current ratio is given by:
Current ratio = Current assets / Current liabilities
A. A current ratio of 0.8 means that current assets are 0.8 times of current liabilities. It would further means that there are lesser amount of current assets available to pay for the current liabilities or short term obligations.
B. Since the amount of current assets are lower in relation to the current liabilities, so it is bad for the firm as the firm may default on its short term obligations when due.
C. In order to be in a better position, the firm has to increase its liquidity. The firm has to make efforts to make its current assets more than its current liabilities. Ideally, a current ratio of 2 is good. Means that the firm's curent assets should be twice its current liabilities. The efforts would mean that the firm may have to increase its cash sales etc.
jeff jeffy answered 2 years agoRelated Solutions
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How
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1)
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