Fundamentals of Financial Management - Essay Example

The level of the current ratio for any particular organization is dependent on the industry it is operating in; usually the acceptable current ratio is 1.5 to 3. If an organization is able to maintain its current ratio between these levels, the lenders are of the perception that the company has the ability to meet its short term financial responsibilities. If the current ratio is low or in other words, the company does not have enough assets to meet its liabilities, the company is perceived to fail its financial obligations.

This ratio is used by creditors while determining whether to provide a loan to a company or not. Creditors perceive that if the company’s current ratio is high, it can pay off its debts and if it is low, it will fail to pay off its debts. This is why certain banks require an organization to meet the requirement of maintaining current ratio levels at 1 or above one.