A high payout ratio indicates that: A. a firm is investing heavily in plant and equipment. The business may be operating beyond its capacity. Current Ratio is a liquidity ratio, indicates the backing available to current liabilities in the form of current assets. Current assets / Current liabilities = Current ratio. Liquidity measures measure a firm's ability to pay operating expenses and other short-term, or current, liabilities. This would indicate that the company can cover its liabilities with its assets. In fact, a high p/e stock can sometimes be cheap. Some people feel that a current ratio that is less than 1:1 indicates insolvency. Solution(By Examveda Team) A higher current ratio indicates strong solvency position and is therefore considered better. A very high current ratio indicates. Describe two situations that might result in the current ratio appearing to be “artificially” high? Expert's Answer. Very high current ratio indicates . liabilities due to be settled within 12 months) are covered by its current assets (i.e. A current ratio of 2 would mean that current assets are sufficient to cover for twice the amount of a company’s short term liabilities. What is the significance of a high PE ratio and does it necessarily means a good chance to short a certain stock and make money? Enter your name and email in the form below and download the free template now! A high current ratio is generally considered a favorable sign for the company. Problem 35Q from Chapter 6: What does a high current ratio indicate about a company? ... A very high current ratio may mean there is excess cash that should possibly be invested elsewhere in the business or that there is too much inventory. While a low current ratio may indicate a problem in meeting current obligations, it is not indicative of a serious problem. A current ratio of less than 1 means the company may run out of money within the year unless it can increase its cash flow or obtain more capital from investors. If the current assets are $600,000 and the current liabilities are $500,000 the current ratio is 1.2:1. A high current ratio does not always indicate that a company has a strong liquidity position. A very high current ratio may indicate existence of idle or underutilized resources in the company. 2:1. A ratio higher than 1 means that your debts are greater than your assets, indicating a very high degree of leverage. Lack of short term investment opportunities. Setting Goals How to Make a Budget Best Budgeting Apps Managing Your Debt Credit Cards. Somalidoon Hamud. by Motilal Oswal. The ratio is used by analysts to determine whether they should invest in or lend money to a business. b) High degree of solvency. The current ratio indicates the availability of current assets in rupee for every one rupee of current liability. Reasons of High Current Ratio. More cash balances are kept idle in banks. Describe two situations that might result in the current ratio appearing to be "artificially" high? Budgeting. Most bankers aren’t going to lend money to a company with a ratio anywhere near 1. If the current ratio is lower than one, it could mean that the company has too many liabilities to cover with assets alone and it might have to take out additional loans. Current ratio indicators . An increasing ratio indicates you are using your assets more productively. A ratio above 1 means that a company will be able to pay off its current liabilities with cash and cash equivalents, and have funds left over. A high current ratio does not always indicate that a. Sep 26 2019 11:55 PM . However, a current ratio that is too high might indicate that the company is missing out on more rewarding opportunities. Which of the following is not a primary function of a Bank? Home / Green Board / Miscellaneous / Question. For example, a current ratio of 1.33:1 indicates 1.33 assets are available to meet the short-term liability of Rs. A standard and ideal current ratio is 2:1 Intermediate Accounting (1st Edition) Edit edition. Aug 25 2019 05:59 PM. Describe two situations that might result in the current ratio appearing to be "artificially" high? It indicates poor sale. A high price-to-earnings ratio does not always mean that a stock is overvalued. Working capital turnover ratios must be compared with those of businesses in the same industry to know what is normal and what is not. 1. a) High efficiency b) flabby inventory c) position of more long term funds. Expert's Answer. The amounts collected from debtors is not satisfactory. Best Banks … A high current ratio can be a sign of problems in managing working capital (what is leftover of current assets after deducting current liabilities). No sufficient funds to pay of its liabilities in time. In the example above, if all of XYZ's current liabilities came due on January 1, 2010, XYZ would be able to meet those obligations with cash . Acid Test Ratio . A high current ratio does not always indicate that a company has a strong liquidity position. Most believe that a ratio between 1.2 and 2.0 is sufficient. Credit Cards 101 Best Credit Cards of 2020 Rewards Cards 101 Best Rewards Credit Cards Credit Card Reviews Banking. a) Use of more debt capital to increase profit. A high current ratio indicates that a company is able to meet its short-term obligations. For example, Sears’ balance sheet for the fiscal year ending in 2017 revealed a debt-to-asset ratio of just over 1.4. A ratio greater than 1 implies that the firm has more current assets than a current liability. The current ratio is a critical liquidity ratio utilized extensively by banks and other financing institutions while extending loans to the businesses. A very high current ratio may hurt a company’s profitability and efficiency. Interest cover indicates how many times a company can cover its current interest payments out of current profits. Current ratio example. Reasons of Low Current Ratio. Higher the ratio better will be the situation. 1 year ago . A very high interest coverage ratio indicates that the firm is conservative in using debt and a very low ratio indicates excessive use of debt. In most industries, a current ratio is too low when it is getting close to 1. The current ratio—sometimes called the working capital ratio—measures whether a company’s current assets are sufficient to cover its current liabilities. The capital gearing ratio is high for a company.It indicates a position of . Although there is no ideal figure, a ratio of not lower than 0.5 to 1 is usually preferred. It suggests that the business has enough cash to be able to pay its debts, but not too much finance tied up in current assets which could be reinvested or distributed to shareholders. A high current ratio does not always indicate that a company has a strong liquidity position. Read all about assets expected to be realized within 12 months). The acid test ratio or the quick ratio calculates the ability to pay off current liabilities with quick assets. The higher your working capital turnover ratio is, the more efficient you are in using working capital to generate sales, but a very high working capital turnover ratio can show that a company does not have enough capital to support its sales growth. Get solutions The current ratio measures the ability of an organization to pay its bills in the near-term. At that point you are just barely able to cover the liabilities that will come due with the cash you’ll have coming in. This is because most of the current assets earn low or no return as compared to long-term assets which are much more productive. There is no upper-end on what is “too much,” as it can be very dependent on the industry, however, a very high current ratio may indicate that a company is leaving excess cash unused rather than investing in growing its business. Intermediate Accounting (2nd Edition) Edit edition. If a company has $2.75 million in current assets and $3 million in current liabilities, its current ratio is $2,750,000 / $3,000,000, which is equal to 0.92, after rounding. 6. c) Low bank finance d) None of the above. A PE of 48.5 indicates growth of 20% a year. Download the Free Current Ratio Formula Template. Disorders of the bone marrow such as multiple myeloma. It is a common measure of the short-term liquidity of a business. For the S&P 500, we take the price divided by the trailing earnings per share. Problem 34Q from Chapter 6: What does a high current ratio indicate about a company? There may be slow moving of stocks. “How to improve current ratio?” is a very common question which keeps hitting the entrepreneur’s mind every now and then. Should you buy a stock that has a high current ratio? The Balance Menu Go. To calculate the current ratio, divid This ratio can be both too low and too high. A high current ratio does not always indicate that a. Money › Stocks › Stock Valuation and Financial Ratios Liquidity Measures: Net Working Capital, Current Ratio, Quick Ratio, and Cash Ratio. A higher current ratio indicates that sufficient assets are available with the organization which can be converted in the form of cash without reduction in value, in a short span of item. Students also viewed these Cost Accounting questions. 1.33:1 <1:1. A very high current ratio could mean that a company is not using its assets and equity efficiently. Obviously a larger current ratio is better than a smaller ratio. Very high current ratio indicates. The lower the current ratio, the more likely a firm is able to pay its short-term obligations D. Relatively high current ratios are usually a sign of efficient working capital management. When the test results shows that you have a high level of total protein in the blood, it may indicate that you have the following medical conditions: Liver related diseases and kidney problems; Inflammation or infections such as HIV or Hepatitis. Creditors are more willing to extend credit to those who can show that they have the resources to pay obligations. Join The Discussion. A. d) b or c. Financial leverage means. The PE ratio we commonly use is trailing P/E: It is obtained by taking the current price divided by the previous annual earnings. Comment * Related User Ask Questions. However, some online sellers with customers paying with credit cards at the time of ordering may operate comfortably with a very low current ratio. Current ratio expresses the extent to which the current liabilities of a business (i.e. Get solutions The higher the current ratio, the more likely a firm is able to pay its short-term obligations. To see the current ratio in practice, here is an example: If a company had current assets of £100,000 and current liabilities of £50,000, then it’s current ratio would be solved by dividing the assets by the liabilities: £100,000 / £50,000 = 2.00. Solution.pdf Next Previous. A PE ratio of 8.5 indicates a company with zero growth while a PE of 18.5 indicates growth of 5% per year. Creditors prefer a high cash ratio, as it indicates that a company can easily pay off its debt. A ratio of 1:1 indicates that current assets are equal to current liabilities and that the business is just able to cover all of its short-term obligations. 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