Current Ratio Flashcards
1
Q
Equation
A
Current assets / current liabilities
2
Q
What is the ideal amount
A
1.5 : 1
3
Q
What does it mean if it is higher
A
Firm has too much cash sitting around = could be reinvested into fixed assets or distributed to share holders
4
Q
What happens if it is lower
A
Business can’t pay their debts over the next 12 months
5
Q
Two ways to improve current ratio if it’s too low
A
- increase cash by selling shares/ assets
- paying off debts
6
Q
How to improve current ratio if it’s too high
A
- sell of reserves of stock = use JIT
- invest into fixed assets (machinery)
