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After calculating the current ratio for an entity and finding that the ratios value was 5:1, a

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After calculating the current ratio for an entity and finding that the ratio’s value was 5:1, a student analyst decided that the company was in a sound position for paying its liquid liabilities. Discuss the shortcomings of making such a conclusion.

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An arbitrary rule of thumb used when assessing current ratio is that there should about 150 of curre...View the full answer


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The current ratio is a financial ratio that measures a company\'s ability to pay its short-term obligations with its short-term assets. It is calculated by dividing a company\'s current assets by its current liabilities. The formula for calculating the current ratio is: Current Ratio = Current Assets / Current Liabilities Current assets are assets that can be converted to cash within one year, while current liabilities are debts that are due within one year. A current ratio of 1:1 or greater is generally considered good, as it indicates that a company has enough current assets to cover its current liabilities. A current ratio of less than 1:1 may suggest that a company may have difficulty meeting its short-term obligations. It\'s important to note that the current ratio is just one of many financial ratios that can be used to assess a company\'s financial health. It should be used in conjunction with other financial ratios and qualitative factors to make informed decisions about investing or lending to a company.

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