Discuss a financial ratio and how financial managers, lenders, and investors use them in their investment decisions.
The current ratio refers to a liquidity ratio, which measures a firm's capability of paying short and long-term obligations (Awais et al., 2015).
This ratio measures the ability towards meeting short-term obligations with short-term assets.
Financial managers, lenders, and investors use this ratio in ensuring that the firm is able to pay its bills, expenses as well as salaries on time.
When a current ratio of less than 1, it shows liquidity problems.
When there is a very high current ratio, this means an excess of unused cash that can be invested somewhere else. A ratio is believed to be optimal when it is between 1.2 and 2 (Awais et al., 2015).
Accounts receivable is used in the current ratio. There are responsibilities of the organization to disclose information in regards to AR that is not collectable.
Think of a situation where the current ratio is very misleading as an indicator of short-term, debt-paying ability?
As an investor what other information might you find on a balance sheet that could be incorrect and effect the current ratio?