Sample interview questions: Can you explain the concept of a current ratio and its importance in investment analysis?
Sample answer:
Concept of Current Ratio:
The current ratio measures a company’s short-term liquidity, i.e., its ability to meet its current financial obligations. It is calculated as the ratio of current assets to current liabilities.
Importance in Investment Analysis:
Evaluating the current ratio is crucial in investment analysis for the following reasons:
1. Liquidity Assessment:
– A higher current ratio indicates a stronger liquidity position.
– Companies with a low current ratio may face challenges in meeting short-term obligations, raising concerns about their financial stability.
2. Bankruptcy Risk Mitigation:
– A current ratio below 1 suggests an increased risk of bankruptcy.
– Investors may be hesitant to invest in companies with a low current ratio due to concerns about their ability to stay solvent.
3. Creditworthiness Determination:
– Lenders and other creditors use the current ratio to assess a company’s creditworthiness.
– Companies with high current ratios are … Read full answer