When examining a company's current ratio, it is important to also assess the quality of the current assets and liabilities.

Question

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A company's current ratio (current assets divided by current liabilities) can give a general idea of its liquidity and ability to pay off short-term debts. However, the current assets and liabilities themselves should be further analyzed to determine their quality and potential for generating cash or causing difficulties in meeting obligations. For example, cash and accounts receivable are generally considered high-quality current assets, while inventory may be less desirable. Similarly, short-term loans and payables are generally considered easier to manage than long-term debt or uncertain contingent liabilities.

When Examining a Company's Current Ratio, It Is Important to Also