A higher Current Ratio generally indicates greater liquidity; the benchmark is

A higher Current Ratio generally indicates greater liquidity; the benchmark is

• A. 1:3
• B. 3:1
• C. 1:1
• D. 2:1

Answer: (D)

Liquidity is about how well a company can meet short-term obligations, so the current ratio is a quick gauge: current assets divided by current liabilities. A higher ratio means more cushion to cover near-term debts. In practice, a ratio around two to one is seen as a comfortable benchmark—roughly two dollars of current assets for every dollar of current liabilities. This level balances security with efficient use of assets. Ratios much higher than that can indicate excess idle resources, while ratios at or below one suggest tighter liquidity and greater risk of not meeting obligations. So the standard benchmark is two to one.

Liquidity is about how well a company can meet short-term obligations, so the current ratio is a quick gauge: current assets divided by current liabilities. A higher ratio means more cushion to cover near-term debts. In practice, a ratio around two to one is seen as a comfortable benchmark—roughly two dollars of current assets for every dollar of current liabilities. This level balances security with efficient use of assets. Ratios much higher than that can indicate excess idle resources, while ratios at or below one suggest tighter liquidity and greater risk of not meeting obligations. So the standard benchmark is two to one.