Florida General Contractor Practice Exam

What does a low current ratio indicate about a company?

1. The company is highly leveraged

2. The company has high liquidity

3. The company can readily pay its short-term obligations

4. The company may struggle to meet short-term liabilities

The correct answer is: The company may struggle to meet short-term liabilities

A low current ratio signifies that a company may struggle to meet its short-term liabilities. The current ratio is a financial metric that evaluates a company's ability to pay off its short-term obligations with its short-term assets. A ratio below the industry standard, often below 1, implies that the company's current assets are insufficient to cover its current liabilities. This situation can indicate potential liquidity issues, meaning that the company might encounter difficulties in making timely payments, which could affect its operational stability and creditworthiness. Consequently, stakeholders, including investors and creditors, might perceive the company as a higher risk due to its financial position.