A current ratio of less than 2.0 is a potential red flag for a company because it means that
A) there is a reasonable chance that debt is outpacing equity.
B) sales allowances may be too high.
C) the company may have potential difficulty paying back current debts.
D) the cost of goods sold is likely too high.
E) profitability is not aligned with GAAP guidelines.

Question

Quizplus · Accepted Answer

The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. A current ratio of less than 2.0 indicates that the company might not have enough liquid assets to cover its short-term liabilities, which could lead to potential difficulty in paying back current debts.

A Current Ratio of Less Than 2