In a case study, if a company's current ratio is 2:1, what does this indicate?

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Question: In a case study, if a company\'s current ratio is 2:1, what does this indicate?

Options:

Correct Answer: The company has twice as many current assets as current liabilities

Solution:

A current ratio of 2:1 indicates that the company has twice as many current assets as current liabilities, suggesting good liquidity.

In a case study, if a company's current ratio is 2:1, what does this indicate?

In a case study, if a company's current ratio is 2:1, what does this indicate?

Step 1: Understand what 'current ratio' means. It is a financial metric that compares a company's current assets to its current liabilities.
Step 2: Know that 'current assets' are things the company owns that can be quickly turned into cash, like cash itself, inventory, and accounts receivable.
Step 3: Understand that 'current liabilities' are what the company owes in the short term, like bills and debts that need to be paid within a year.
Step 4: A current ratio of 2:1 means for every 1 dollar of current liabilities, the company has 2 dollars of current assets.
Step 5: This indicates that the company is in a good position to pay off its short-term debts, suggesting it has good liquidity.

Current Ratio – A financial metric that measures a company's ability to pay short-term obligations with its short-term assets.
Liquidity – The ability of a company to meet its short-term financial obligations.