What is considered a good Current Ratio for a stable financial position?

A Current Ratio of 2:1 is typically considered a good indicator of a stable financial position for a business. The Current Ratio measures a company's ability to pay off its short-term liabilities with its short-term assets. A ratio of 2:1 implies that for every dollar of current liabilities, the company has two dollars in current assets. This cushion not only suggests a sound liquidity position but also reassures creditors and investors that the company can meet its short-term obligations while retaining some assets for operations and growth.

While a 1:1 ratio indicates that current assets equal current liabilities, it does not provide much of a safety margin. A ratio higher than 2:1, such as 3:1 or 4:1, while still positive, may suggest that the company is not utilizing its assets efficiently or may be holding too much in liquid assets instead of reinvesting them. Therefore, the balance struck by a 2:1 ratio presents a more financially healthy approach for a company.