As an investor what other information might you find on a balance

Discuss a financial ratio and how financial managers, lenders, and investors use them in their investment decisions.

            The current ratio refers to a liquidity ratio, which measures a firm’s capability of paying short and long-term obligations (Awais et al., 2015). This ratio measures the ability towards meeting short-term obligations with short-term assets. Financial managers, lenders, and investors use this ratio in ensuring that the firm is able to pay its bills, expenses as well as salaries on time. When a current ratio of less than 1, it shows liquidity problems. When there is a very high current ratio, this means an excess of unused cash that can be invested somewhere else. A ratio is believed to be optimal when it is between 1.2 and 2 (Awais et al., 2015).

  • Accounts receivable is used in the current ratio.  There are responsibilities of the organization to disclose information in regards to AR that is not collectable. 
  • Think of a situation where the current ratio is very misleading as an indicator of short-term, debt-paying ability?  As an investor what other information might you find on a balance sheet that could be incorrect and effect the current ratio?
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