Creditors prefer a high cash ratio, as it indicates that a company can easily pay off its debt. Current Ratio is a liquidity ratio, indicates the backing available to current liabilities in the form of current assets. Best Banks … Problem 35Q from Chapter 6: What does a high current ratio indicate about a company? The amounts collected from debtors is not satisfactory. 1 year ago . A ratio higher than 1 means that your debts are greater than your assets, indicating a very high degree of leverage. The acid test ratio or the quick ratio calculates the ability to pay off current liabilities with quick assets. A very high current ratio indicates. The current ratio indicates the availability of current assets in rupee for every one rupee of current liability. If a company has $2.75 million in current assets and $3 million in current liabilities, its current ratio is $2,750,000 / $3,000,000, which is equal to 0.92, after rounding. A ratio above 1 means that a company will be able to pay off its current liabilities with cash and cash equivalents, and have funds left over. Join The Discussion. This is because most of the current assets earn low or no return as compared to long-term assets which are much more productive. When the test results shows that you have a high level of total protein in the blood, it may indicate that you have the following medical conditions: Liver related diseases and kidney problems; Inflammation or infections such as HIV or Hepatitis. Expert's Answer. In most industries, a current ratio is too low when it is getting close to 1. Current assets / Current liabilities = Current ratio. Liquidity measures measure a firm's ability to pay operating expenses and other short-term, or current, liabilities. Acid Test Ratio . The higher your working capital turnover ratio is, the more efficient you are in using working capital to generate sales, but a very high working capital turnover ratio can show that a company does not have enough capital to support its sales growth. At that point you are just barely able to cover the liabilities that will come due with the cash you’ll have coming in. Current ratio expresses the extent to which the current liabilities of a business (i.e. The Balance Menu Go. Download the Free Current Ratio Formula Template. “How to improve current ratio?” is a very common question which keeps hitting the entrepreneur’s mind every now and then. Somalidoon Hamud. Intermediate Accounting (1st Edition) Edit edition. The current ratio—sometimes called the working capital ratio—measures whether a company’s current assets are sufficient to cover its current liabilities. The PE ratio we commonly use is trailing P/E: It is obtained by taking the current price divided by the previous annual earnings. For the S&P 500, we take the price divided by the trailing earnings per share. 1.33:1 <1:1. A current ratio of less than 1 means the company may run out of money within the year unless it can increase its cash flow or obtain more capital from investors. Get solutions A high current ratio does not always indicate that a company has a strong liquidity position. Lack of short term investment opportunities. A very high current ratio may hurt a company’s profitability and efficiency. A high price-to-earnings ratio does not always mean that a stock is overvalued. Some people feel that a current ratio that is less than 1:1 indicates insolvency. Comment * Related User Ask Questions. A high current ratio is generally considered a favorable sign for the company. In fact, a high p/e stock can sometimes be cheap. For example, a current ratio of 1.33:1 indicates 1.33 assets are available to meet the short-term liability of Rs. Describe two situations that might result in the current ratio appearing to be "artificially" high? Solution.pdf Next Previous. Current ratio indicators . Creditors are more willing to extend credit to those who can show that they have the resources to pay obligations. A high level of total protein. It indicates poor sale. If the current assets are $600,000 and the current liabilities are $500,000 the current ratio is 1.2:1. Enter your name and email in the form below and download the free template now! No sufficient funds to pay of its liabilities in time. A higher number indicates better short-term financial health, and a ratio of 1-to-1 or better indicates a company has enough current assets to cover its short-term liabilities without selling fixed assets. Home / Green Board / Miscellaneous / Question. 1. A PE ratio of 8.5 indicates a company with zero growth while a PE of 18.5 indicates growth of 5% per year. The current ratio is a critical liquidity ratio utilized extensively by banks and other financing institutions while extending loans to the businesses. A very high interest coverage ratio indicates that the firm is conservative in using debt and a very low ratio indicates excessive use of debt. A high current ratio can be a sign of problems in managing working capital (what is leftover of current assets after deducting current liabilities). What is the significance of a high PE ratio and does it necessarily means a good chance to short a certain stock and make money? Intermediate Accounting (2nd Edition) Edit edition. To calculate the current ratio, divid Aug 25 2019 05:59 PM. However, a current ratio that is too high might indicate that the company is missing out on more rewarding opportunities. Although there is no ideal figure, a ratio of not lower than 0.5 to 1 is usually preferred. A high current ratio does not always indicate that a company has a strong liquidity position. Working capital turnover ratios must be compared with those of businesses in the same industry to know what is normal and what is not. A high current ratio indicates that a company is able to meet its short-term obligations. A higher current ratio indicates that sufficient assets are available with the organization which can be converted in the form of cash without reduction in value, in a short span of item. The current ratio measures the ability of an organization to pay its bills in the near-term. Money › Stocks › Stock Valuation and Financial Ratios Liquidity Measures: Net Working Capital, Current Ratio, Quick Ratio, and Cash Ratio. A high current ratio does not always indicate that a. by Motilal Oswal. The business may be operating beyond its capacity. Students also viewed these Cost Accounting questions. Should you buy a stock that has a high current ratio? Reasons of High Current Ratio. a) Use of more debt capital to increase profit. There may be slow moving of stocks. A current ratio of between 1.0-3.0 is pretty encouraging for a business. liabilities due to be settled within 12 months) are covered by its current assets (i.e. This would indicate that the company can cover its liabilities with its assets. Get solutions A high current ratio does not always indicate that a company has a strong liquidity position. Current ratio example. A very high current ratio may indicate existence of idle or underutilized resources in the company. 2:1. A PE of 48.5 indicates growth of 20% a year. It suggests that the business has enough cash to be able to pay its debts, but not too much finance tied up in current assets which could be reinvested or distributed to shareholders. The capital gearing ratio is high for a company.It indicates a position of . Obviously a larger current ratio is better than a smaller ratio. There is no upper-end on what is “too much,” as it can be very dependent on the industry, however, a very high current ratio may indicate that a company is leaving excess cash unused rather than investing in growing its business. Budgeting. Read all about In the example above, if all of XYZ's current liabilities came due on January 1, 2010, XYZ would be able to meet those obligations with cash . A current ratio of 2 would mean that current assets are sufficient to cover for twice the amount of a company’s short term liabilities. Credit Cards 101 Best Credit Cards of 2020 Rewards Cards 101 Best Rewards Credit Cards Credit Card Reviews Banking. b) High degree of solvency. For example, Sears’ balance sheet for the fiscal year ending in 2017 revealed a debt-to-asset ratio of just over 1.4. More cash balances are kept idle in banks. Describe two situations that might result in the current ratio appearing to be “artificially” high? Very high current ratio indicates . To see the current ratio in practice, here is an example: If a company had current assets of £100,000 and current liabilities of £50,000, then it’s current ratio would be solved by dividing the assets by the liabilities: £100,000 / £50,000 = 2.00. However, some online sellers with customers paying with credit cards at the time of ordering may operate comfortably with a very low current ratio. The ratio is used by analysts to determine whether they should invest in or lend money to a business. A ratio greater than 1 implies that the firm has more current assets than a current liability. A high payout ratio indicates that: A. a firm is investing heavily in plant and equipment. The higher the current ratio, the more likely a firm is able to pay its short-term obligations. assets expected to be realized within 12 months). d) b or c. Financial leverage means. Disorders of the bone marrow such as multiple myeloma. A. Reasons of Low Current Ratio. A high current ratio does not always indicate that a. Sep 26 2019 11:55 PM . A ratio of 1:1 indicates that current assets are equal to current liabilities and that the business is just able to cover all of its short-term obligations. Higher the ratio better will be the situation. It is a common measure of the short-term liquidity of a business. Very high current ratio indicates. If the current ratio is lower than one, it could mean that the company has too many liabilities to cover with assets alone and it might have to take out additional loans. c) Low bank finance d) None of the above. Setting Goals How to Make a Budget Best Budgeting Apps Managing Your Debt Credit Cards. The lower the current ratio, the more likely a firm is able to pay its short-term obligations D. Relatively high current ratios are usually a sign of efficient working capital management. Solution(By Examveda Team) A higher current ratio indicates strong solvency position and is therefore considered better. This ratio can be both too low and too high. A standard and ideal current ratio is 2:1 a) High efficiency b) flabby inventory c) position of more long term funds. Interest cover indicates how many times a company can cover its current interest payments out of current profits. While a low current ratio may indicate a problem in meeting current obligations, it is not indicative of a serious problem. A very high current ratio could mean that a company is not using its assets and equity efficiently. An increasing ratio indicates you are using your assets more productively. Problem 34Q from Chapter 6: What does a high current ratio indicate about a company? 6. Describe two situations that might result in the current ratio appearing to be "artificially" high? Expert's Answer. Which of the following is not a primary function of a Bank? ... 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