What does a high current ratio indicate about a company?

A high current ratio indicates that a company has a strong ability to meet its short-term liabilities using its short-term assets. The current ratio is calculated by dividing current assets (such as cash, inventory, and accounts receivable) by current liabilities (like accounts payable and other short-term obligations). A ratio significantly greater than 1 suggests that the company has more current assets than current liabilities, indicating an adequate buffer to cover short-term obligations.

This financial metric is often viewed as a sign of good short-term financial health because it signals to creditors and investors that the company is in a strong position to pay its debts as they come due. It reflects prudent financial management and positions the company well to handle unexpected expenses or downturns in revenue without jeopardizing its operational stability.