When evaluating current liabilities and current assets, a negative current ratio indicates what?

When evaluating current liabilities and current assets, a negative current ratio indicates what?

• A. Positive working capital
• B. Insolvency risk
• C. Financial stability
• D. High liquidity

Answer: (B)

A negative current ratio indicates insolvency risk because it suggests that current liabilities outweigh current assets. The current ratio is calculated by dividing current assets by current liabilities. When the result is negative, it means that a company does not have enough current assets to cover its obligations that are due within the next year. This situation is a red flag for creditors and investors, as it indicates potential difficulty in meeting short-term financial commitments. In essence, a negative current ratio signals that the company's financial health may be in jeopardy, which heightens the risk of insolvency. This is critical for assessing the company's liquidity and overall financial stability.

A negative current ratio indicates insolvency risk because it suggests that current liabilities outweigh current assets. The current ratio is calculated by dividing current assets by current liabilities. When the result is negative, it means that a company does not have enough current assets to cover its obligations that are due within the next year. This situation is a red flag for creditors and investors, as it indicates potential difficulty in meeting short-term financial commitments. In essence, a negative current ratio signals that the company's financial health may be in jeopardy, which heightens the risk of insolvency. This is critical for assessing the company's liquidity and overall financial stability.