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High current ratio is not always a good indicator of comfortable liquidity.
Higher funds blocked in debtors, inventory will lead to a cash crunch in the company in the short term. Though the higher debtors, inventory result in increased current ratio, increased cash crunch results in less comfortable liquidity position.
Also, a higher current asset position and a lower creditors position may result in working capital stretch and hence again lead to a cash crunch posiiton. Points such as whether there is any problem with the realization of debtors or is the customer not being able to get enough credit in the market due to any rupture in his credentials is to be looked at. Probably, I would be looking at the debtors ageing and crediors ageing for the customer.
Hence, high current raio is not always an indicator of comfortable liquidity position.
Thanks for the invitation.
A high current ratio is a common indicator but it has some drawbacks. For expample, in calculates inventories as well as an amount, but you can't be sure of the condition of the inventoty; it might be damaged, outdated, poorly estimated (FIFO - LIFO) or may have other issues. In addition I agreewith the general preceding answer regarding cash crunches.
As such personally I would chose quick ratio as an indicator for an immediate purpose or acid test ratio for a more cholistic view of the cash of the company
The higher the ratio, the more liquid the company is. Commonly acceptable current ratio is 2; it's a comfortable financial position for most enterprises. Acceptable current ratios vary from industry to industry. For most industrial companies, 1.5 may be an acceptable current ratio.
Low values for the current ratio (values less than 1) indicate that a firm may have difficulty meeting current obligations. However, an investor should also take note of a company's operating cash flow in order to get a better sense of its liquidity. A low current ratio can often be supported by a strong operating cash flow.
If the current ratio is too high (much more than 2), then the company may not be using its current assets or its short-term financing facilities efficiently. This may also indicate problems in working capital management.
All other things being equal, creditors consider a high current ratio to be better than a low current ratio, because a high current ratio means that the company is more likely to meet its liabilities which are due over the next 12 months.
No, this depends on the quality of the inventory and receivables.
Thank you for invitation. Agree on expert answer given here.
Couldn't agree more, expert answer is superb. However, in order to measure the short term liquidity position, we need to evaluate the quick ratio (also known as acid test ratio) which is useful to analyse the company's ability to pay off it's obligation even if the debtors and inventory are not realise on time.
Further, higher current ratio which is above the industry standard is not always good indicator, higher current ratio means, company's working capital assets management is not good. which leads to higher holding cost and as a result lower profit.
agree with Mr. Sai,
thank you for the invitation
agree with answers ,,,,,,,,,,,,,,,,,,,,,,,,,,,...................................
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