Understanding Financial Health Through Ratios
The current ratio is a key financial metric that measures a company's ability to pay off its short-term liabilities with its current assets. This liquidity ratio is an important indicator of a company's financial health and operational efficiency.
| Rating | Ratio Range | Interpretation | Recommendations |
|---|---|---|---|
| Strong | > 2.0 | Company has strong liquidity position | Consider investing excess cash or returning to shareholders |
| Good | 1.5 - 2.0 | Healthy working capital management | Maintain current practices while monitoring for improvements |
| Fair | 1.0 - 1.5 | Adequate but could improve | Review working capital management strategies |
| Poor | < 1.0 | Potential liquidity issues | Immediate action needed to improve working capital |
Company: Tech Solutions Inc.
This indicates strong liquidity, typical for tech companies with significant cash reserves and minimal inventory.
Company: Retail Stores Corp
Shows healthy liquidity while maintaining efficient inventory management, typical for retail operations.
| Industry | Typical Range | Key Considerations |
|---|---|---|
| Technology | 2.0 - 4.0 | High cash reserves, minimal inventory |
| Retail | 1.5 - 2.0 | Significant inventory levels |
| Manufacturing | 1.2 - 1.8 | High inventory and receivables |
| Services | 1.0 - 1.5 | Limited inventory needs |
When analyzing current ratio trends, consider: