Peak Performance Sporting Goods Company has just applied for a bank loan in order to expand the business. Using the most recent balance sheet data provided by the company owner, you calculate that the company's current ratio is 2.5. In your presentation to the company boss, you remark:

Healthy current ratio. Peak performance has $2.5 of current asset for every $1 current liability owed

Explanation:

Current ratio is a business analysis tool that is used to evaluate the ability of a company to meet short term financial obligation. It is a measure of the relationship between the current asset and and the current liability by diving the current asset by the current liability.

For the purpose of effective analysis , a good current ratio is in the range of 1.2 -2 :1.  In other word , the current asset should be higher than the current liability in at least 1.2 times .

In a situation where the current liability is greater than the current asset , it is precarious and the owing company might not be able to meet up with repayment.

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