Liquidity is an important key in economic depression period

Current ratio measures whether a company has enough money to pay its liabilities over 12 months period, and it is calculated by current assets divided by current liabilities. For example, company A has $2 million of current assets, and $1.5 million of current liabilities. Then, company A’s current ratio would be 1.3333:1. It means that company A has 1.3333 dollar of assets when it has a dollar of debts. In addition, a recommended current ratio for any company would be the 2:1; it means the company has twice more assets than its debts. Thus, we can conclude that company is very secure. However, if the current ratio is too high, it does not mean that the company manages its capital wisely. The reason is that if the company’s assets are too much, which is more than double, relative to its liabilities, it means the company does not use its assets efficiently. The company could invest or start a new project with those assets. If a company’s current ration is less than 1, it does not mean that the company is facing shortfall in its cash. The reason is that the company’s inventory turns over quickly, and its cash keep flowing such as grocery stores and fast food restaurants, so the current ratio could become less than 1. People have two perspectives on low current ratio. One is that the company uses its assets efficiently, and other perspective is that the company manages its capital so risky. In conclusion, if a company tries to use its assets fully, and it invests and starts a new project with its assets, its current ratio would be low. In addition, if the company tends to keep money instead of investing or starting a new project, its current ratio would be high. However, we cannot conclude which company is better than the other.

http://en.wikipedia.org/wiki/Current_ratio