Accounting · Ratio Analysis
A credit analyst is evaluating a manufacturing firm where the current ratio is 2.5:1, the quick ratio is 0.8:1, and the absolute liquid ratio is 0.2:1. Given that the current liabilities stand at 400 million units, and the firm operates in a seasonal industry, which of the following analytical conclusions represents the most profound risk to the short-term solvency of the organization despite an apparently healthy current ratio?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The absolute liquid ratio suggests that the firm has zero dependence on bank overdrafts for working capital requirements.
- 2The quick ratio indicates that the firm is in a position to meet all immediate obligations without selling any stock.
- 3The high current ratio is masking an over-investment in slow-moving inventory and a potentially high level of non-liquid receivables.✓
- 4The firm has excessive cash reserves that are not being deployed efficiently into income-generating assets.
Correct answer
The high current ratio is masking an over-investment in slow-moving inventory and a potentially high level of non-liquid receivables.
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