Question

Provide a well detailed answer and do not copy and paste.

What type of recommendation can be given to companies to keep them moving forward when they have high current ratios (i.e. liquidity)?

Answer 1

Current ratio = Current Assets/ Current liabilities.

A current ratio on par with industry average or little higher is considered healthy. If a company has a high current ratio that is high liquidity than the industry average it signifies that companies unable to utilise their resources properly and destroying shareholders value. The company should actively look for opportunities in its industry to invest funds and generate value from the excess funds. It will help the company in moving forward.

The other option is the buyback or Repurchase of its own shares. It ensures that excess funds are not ideally kept and instead given back to shareholders (owners) in the form of repurchase. It also helps in concentration of earnings per share and ownership of the business.
This step helps in bringing the current ratio to the industry average.

The other option is paying back it's debt. It helps in reducing the interest expenditure the company increase every year. A dollar saved, is dollar earned.
Debt is a double edge sword. It must be used when necessary and paid back when excess is available.