A high level of current assets relative to current liabilities indicates good which of the following?

A high level of current assets relative to current liabilities indicates good which of the following?

• A. Liquidity
• B. Solvency
• C. Profitability
• D. Leverage

Answer: (A)

Liquidity is about a company’s ability to cover short-term debts using assets that can be converted to cash soon. When current assets are high relative to current liabilities, the firm has a healthy cushion to pay bills, meet payroll, and satisfy supplier terms without scrambling for cash. The idea is often summarized by the current ratio (current assets divided by current liabilities): a larger ratio means more liquidity. This differs from solvency, which looks at long-term ability to meet obligations; profitability, which concerns earning power; and leverage, which relates to how much debt the business carries relative to equity or assets. So a high level of current assets relative to current liabilities best indicates strong liquidity.

Liquidity is about a company’s ability to cover short-term debts using assets that can be converted to cash soon. When current assets are high relative to current liabilities, the firm has a healthy cushion to pay bills, meet payroll, and satisfy supplier terms without scrambling for cash. The idea is often summarized by the current ratio (current assets divided by current liabilities): a larger ratio means more liquidity. This differs from solvency, which looks at long-term ability to meet obligations; profitability, which concerns earning power; and leverage, which relates to how much debt the business carries relative to equity or assets. So a high level of current assets relative to current liabilities best indicates strong liquidity.