What is the average current ratio?

What is the average current ratio?

• A. 1.0
• B. 2.0
• C. 3.0
• D. 1.5

Answer: (B)

The average current ratio refers to a measure of a company's ability to cover its short-term obligations with its short-term assets. It is calculated by dividing current assets by current liabilities. An average current ratio of 2.0 is often considered healthy, as it suggests that the company has twice as many current assets as it has current liabilities, indicating a strong liquidity position. Having a ratio of 2.0 implies that for every dollar the company owes in short-term liabilities, it has two dollars in short-term assets available to cover those debts. This level of liquidity is generally viewed positively by lenders and investors, as it suggests financial stability and a low risk of insolvency in the near term. In contrast, a ratio that is significantly lower than 2.0 might indicate potential liquidity issues, while a much higher ratio could suggest that the company is not efficiently utilizing its assets to generate revenue. A comprehensive understanding of this metric helps stakeholders assess the short-term financial health of a business.

The average current ratio refers to a measure of a company's ability to cover its short-term obligations with its short-term assets. It is calculated by dividing current assets by current liabilities. An average current ratio of 2.0 is often considered healthy, as it suggests that the company has twice as many current assets as it has current liabilities, indicating a strong liquidity position.

Having a ratio of 2.0 implies that for every dollar the company owes in short-term liabilities, it has two dollars in short-term assets available to cover those debts. This level of liquidity is generally viewed positively by lenders and investors, as it suggests financial stability and a low risk of insolvency in the near term.

In contrast, a ratio that is significantly lower than 2.0 might indicate potential liquidity issues, while a much higher ratio could suggest that the company is not efficiently utilizing its assets to generate revenue. A comprehensive understanding of this metric helps stakeholders assess the short-term financial health of a business.