Pros and cons of current ratios
Pros of current ratios
Current ratio can give you an understanding of a company’s financial strength without having to go into too much detail. It can also be useful in determining how efficient a business is in terms of optimising production, and selling off assets (how quickly it can convert assets to cash). Lastly, it gives you an idea of how management handles liabilities and debt repayments.
Cons of current ratios
The current ratio alone cannot give you insight into the liquidity of a company because rather than assessing the quality of the assets, it only tells us how many assets exist. If the assets are of a low quality, there could still be issues involved in selling them.
Current ratio is also not a truly comparable measure because different companies have different inventory management methods. It is also easy to manipulate the current ratio due to factors such as seasonal sales; the ratio can change from season to season due to fluctuations in the number of products being sold.