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What does it mean if a current ratio went from 1.40 one year and the next...

What does it mean if a current ratio went from 1.40 one year and the next is 1.22

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Answer #1

Current ratio = current assets / current liabilities

Current ratio discloses financial health of the company .

It discloses the ability of the company to pay current liabilities .

As there is decline in current ratio in present case, it jndicates Comapany is going under bad situation as compared to previous year.

Decline in current ratio may be due to, problems with inventory management , reduction in accounts receivable , reduction in holding cash, increase in trade payables and many more reasons .

In short, decline in current ratio is not favourable for financial health of company .

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