Financial Ratio Analysis - Ideal Ratio

No such thing as an Ideal Ratio

It's time to say that whatever you've read about the ideal current ratio being 2:1 and the ideal acid test ratio being 1: 1 forget it! This is a golden rule ...there's no such thing as an ideal current ratio or acid test ratio ... or an ideal any other ratio for that matter.

We still need to know whether 0.98: 1 and 1.42: 1 are good results, though.

For the Carphone Warehouse, there has been a major turnaround between the two years as the ratio has increased from 0.98: 1 to 1.42:1. Look at the accounting information above and you can see that whilst the business has increased its sales by 59% over the two years, its stocks are almost unchanged; debtors have increased by 80%, investments by 316% and cash by 166%.

As always, we have to point out that we only have two years' worth of data so any conclusions we can draw have to be done cautiously.

You can now attempt some additional questions or move on to Asset usage

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