7.2e Ratios - Current Ratio (Liquidity) Flashcards
1
Q
What do current ratios measure?
A
Liquidity
2
Q
What is liquidity?
A
The ability of a business to pay its way
3
Q
Current ratio formula
A
Current ratio = current assets ÷ current liabilities
4
Q
What does a current ratio of 1.5-2.0 suggest?
A
Efficient management of working capital
5
Q
What does a low current ratio (below 1) indicate?
A
Cash problems
6
Q
What does a high current ratio mean?
A
Too much working capital
7
Q
Ways to increase liquidity:
A
- Decrease stock levels
- Speed up collection of debts
- Slow down payments to creditors
