Ratio Analysis

Question 1

What does the current ratio tell us?

Answer 1

This tells us about the relationship between the current assets and the current liabilities

Question 2

what is the ideal ratio for the current ratio?

Answer 2

The ideal ratio is somewhere inbetween 1.5:1 and 2:1

Question 3

What happens if the ratio is above or below the ideal?

Answer 3

If the ratio is below 1.5:1 it means that the business is overborrowing and is using a lot of its capital to pay back what they borrowed. If the ratio is above 2:1 then it means that too much money in the business is not being used productively and is just sitting around