GreenTech has a current ratio of 2.5, higher than the industry average of 1.8. What does this likely indicate about GreenTech relative to the industry average:

Question

BlackTom AI · Accepted Answer

Begin by restating the core information and what the current ratio measures.
The current ratio is current assets divided by current liabilities, and a higher ratio generally signals stronger short-term liquidity, meaning the company can cover its short-term obligations more easily.
Option A: Better long-term solvency. This is not directly indicated by the current ratio. Solvency refers to ability to meet long-term obligations and structural leverage, which requires looking at debt levels, interest coverage, and capital structure, not just current assets versus current liabilities.
Option B: Better profitability. Profitability hinges on earnings performance, margins, and return on assets or equity. The current ratio does not measure profit or efficiency; a firm can be highly liquid but unprofitable, or profitable but illiquid.
Option C: Better short-term liquidity. This directly aligns with the meaning of a higher current ratio. With a ratio of 2.5 versus an industry average of 1.8, GreenTech appears better positioned to pay its short-term bills, assuming asset quality is not anomalous.
Option D: Higher debt levels. A higher current ratio can sometimes reflect lower leverage (more working capital) or, alternatively, a large amount of current assets like cash or receivables. It does not inherently indicate higher debt levels; in fact, it could be associated with less reliance on short-term borrowings, though context matters. Misinterpreting this as higher debt would be a logical flaw.
In summary, the key takeaway is that the current ratio is a liquidity metric, so a figure of 2.5 compared to 1.8 most straightforwardly points to stronger short-term liquidity, while offering limited direct insight into solvency, profitability, or debt levels without additional information.

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GreenTech has a current ratio of 2.5, higher than the industry average of 1.8. What does this likely indicate about GreenTech relative to the industry average:

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