Question

A company's current ratio is rising and is now higher than the current ratio for its...

A company's current ratio is rising and is now higher than the current ratio for its primary competitor. Give me three (3) reasons why this might be considered a bad thing for the company? What could it potentially indicate? (Put another way, what three (3) "bad" things could lead to a rising current ratio?)

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Answer #1

Three reasons for which high current ratio would be bad can be explained by writing the formulae first.

Current ratio = current assets/ current liabilities.

It measures if a company is able to meet short term obligations or not.

So if it is over high it means

1. Current assets are higher than liabilities portion which indicates company is not managing working capital efficiently.

2. It could be due to low liabilities which implies company is not using the debt portion significant efficient manner

3. It can be also high if liquid assets like cash and cash equivalents are very high indicating cash flow mismanagement.

Please hit the like button :)

Took me serious efforts

Thanks & Regards

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