Question

The book covers 21 different financial ratios. How would a user know if a particular ratio...

The book covers 21 different financial ratios. How would a user know if a particular ratio demonstrates that a company is doing well or doing poorly? As an example to help explain what I am asking, if a company has a Current Ratio calculated at 2.67. Is that good or bad? How would I know?

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Answer #1

There is an ideal ratio for all the financial ratios. A ratio for a particular company should be compared with the ideal ratio to judge if the given ratio is good or bad.

For eaxmaple, The ideal Current ratio is 2:1

Now, since Current Ratio = Current Assets/Curret Liabilities, it is always good to have more assets. Hence. any ratio above 2:1 would denote higher current assets over current liabilites and hence is good

So. 2.67 current ratio is good for the company

Similarly, there are ideals/benchmarks for other financial ratios as well such as an ideal Quick ratios is 1:1. The higher, the better

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