A current ratio of 1.2 indicates that a company has 1.2 times more current assets than current liabilities. This means that for every dollar of liability that the company needs to pay off in the short term, it has $1.20 in assets that can be converted to cash or used to settle those liabilities.
In practical terms, a current ratio above 1 suggests that the company is in a stable position to cover its short-term obligations. A ratio of 1.2 demonstrates financial health, implying that the company is managing its assets well and should be able to pay off its debts without difficulty.
However, it’s also important to consider this ratio in the context of the industry standards, as what is considered a healthy ratio may vary by sector. For instance, industries that are more capital-intensive may have lower current ratios, while those that rely less on physical assets may have higher ratios. Overall, while a current ratio of 1.2 suggests a positive outlook for liquidity, further analysis may be necessary to get a complete picture of the company’s financial health.