What does the current ratio tell investors?
As mentioned above, the current ratio tells investors whether or not a company can pay its short-term obligations. This is important if you want to buy stock in a company that's solvent and will remain that way for the long term.
However, it's not that simple. One single current ratio doesn't mean much. Companies that are seasonal or have seasonal cycles in either product production or accounts receivable can look very poor when it comes to the current ratio at certain times of the year and very good at others. However, if you look at several years' worth of quarterly current ratios, it's easier to see a pattern emerge.
Does the company tend to have current ratios that indicate it's financially responsible? Are current ratios climbing over the years, or are they dropping?
Using the current ratio to compare against competitors is also helpful since you can easily see how each behaves over time, establish an industry benchmark, and choose the company you find to be the healthiest over the long term.
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