Michigan Residential Builders License Practice Test

What is considered an acceptable current ratio for a business?

1. 1 to 1

2. 2 to 1

3. 3 to 1

4. 4 to 1

The correct answer is: 2 to 1

An acceptable current ratio for a business is often considered to be around 2 to 1. This ratio indicates that a company has twice as many current assets as it does current liabilities, which typically suggests a healthy financial position. A current ratio at this level implies that the business should be able to meet its short-term obligations without facing liquidity issues. A ratio significantly higher than this, such as 3 to 1 or 4 to 1, might indicate that the company is not effectively using its assets to generate revenue, potentially leading to inefficiencies. Conversely, a current ratio of 1 to 1 is generally viewed as a critical situation where the business has just enough current assets to cover its current liabilities, leaving little margin for error in case of unexpected expenses or dips in revenue.