The current ratio is a liquidity measure that compares a firm’s current assets to its current liabilities. A current ratio of 0.50 indicates that for every dollar of liabilities, the firm only has 50 cents in assets available to cover those obligations. This scenario can signal potential liquidity problems, meaning the firm may struggle to meet its short-term obligations.
Having a current ratio of 1.50 would indeed be better for the firm. With a ratio of 1.50, the firm has $1.50 in current assets for every dollar of current liabilities. This suggests a healthier liquidity position, indicating that the firm is better equipped to handle its short-term debts and is less likely to face cash flow issues.
If the current ratio were even higher, at 15.0, it might indicate excessive liquidity, where the firm has a vast amount of current assets compared to liabilities. While it shows strong capability to cover debts, it could also imply that the firm is not effectively utilizing its assets to generate growth. Therefore, while a current ratio of 15.0 is generally seen as very safe, achieving balance is key to optimal financial management.