Question

company A has a current ratio of 2.50 and a quick ratio of 1.25. What can you tell me about the company? Is company A better or worse than company B with a current ratio of 3.20 and a quick ratio of 1.25? What else would you need to know to better determine which company is best? justify your response

Answer 1

Current ratio and quick ratio indicates liquidity of company. Current ratio is calculated as current assets divided by current liabilities while quick ratio uses quick assets instead of current assets. Quick assets is calculated as current assets less inventory less prepaid expenses. In case of company A and company B, the current ratio and quick ratio is higher than 1 and thus both company are highly liquid. However current ratio of company B is higher than company A and hence company A is worse than company B in terms of liquidity comparison. Quick ratio of both companies are similar and hence can be used to judge which company is better. The further break-up of current assets, current liabilities and other financial statement would help to better judge the companies performance. Also the details on industry average would help to determine which company is better when compared with industry data.