Florida General Contractor Practice Exam

A current ratio of 1.5 to 1 indicates what about a company's financial condition?

1. Assets are greater than liabilities

2. Liabilities exceed cash flow

3. Company is in poor financial health

4. Assets can cover liabilities 1.5 times

The correct answer is: Assets can cover liabilities 1.5 times

A current ratio of 1.5 to 1 indicates that for every dollar of liabilities, the company has $1.50 in assets. This suggests a healthy liquidity position, meaning that the company is well-equipped to meet its short-term obligations. When examining the current ratio in this context, a ratio above 1 typically indicates that the company's current assets exceed its current liabilities, which is a positive sign of financial stability. Specifically, a ratio of 1.5 signifies that the assets not only cover the liabilities but do so by a margin of 50%, highlighting good financial management and the capability to handle unforeseen expenses or downturns. This level of coverage implies that the company can effectively fulfill its short-term debts while potentially investing in growth opportunities. Thus, it underscores the company’s solid standing in terms of its current financial obligations and reflects positively on its overall financial health.