A company’s current ratio is 2.5 and its quick ratio is 1.0. What can be reasonably inferred from this information?

• Current Ratio = Current Assets / Current Liabilities • Quick Ratio = (Current Assets – Inventory – Prepaid Expenses) / Current Liabilities • A current ratio of 2.5 means the company has ₹2.50 in current assets for every ₹1.00 of current liabilities — a strong liquidity position. • A quick ratio of 1.0, however, indicates that after removing inventory and prepaid items, the quick assets just cover the liabilities. ➡️ The large gap between the two ratios (2.5 – 1.0 = 1.5) implies that a major part of the current assets is composed of inventory, which is less liquid.