What does a high current ratio mean?

A current ratio that is lower than the industry average may indicate a higher risk of distress or default by the company. If a company has a very high current ratio compared with its peer group, it indicates that management may not be using its assets efficiently.

What is a current ratio & why is it important?

It takes all of your company’s current assets, compares them to your short-term liabilities, and tells you whether you have enough of the former to pay for the latter. In other words, the current ratio is a good indicator of your company’s ability to cover all of your pressing debt obligations with the cash and short-term assets you have on hand.

What does a low current ratio mean?

A current ratio below 1.0 suggests that a company’s liabilities due in a year or less are greater than its assets. A low current ratio could indicate that the company may struggle to meet its short-term obligations. However, similar to the example we used above, special circumstances can negatively affect the current ratio in a healthy company.