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OklaBoston (68.06)

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August 16, 2011 – Comments (1)

I understand now as a result of the comments on my previous post that a stock's Quick Ratio can never be higher than it's Current Ratio, but would still like other Fools' opinions on whether the Current Ratio should be the higher of the 2. My impression is that it should, but also suspect that such a state of affairs could be an indication that management is not investing as much as it should in plant, product research, etc. Is that impression correct or incorrect?

I'm posting this so early in the morning because of a bout of insomnia, in case anyone's wondering. 

 

1 Comments – Post Your Own

#1) On August 16, 2011 at 8:09 AM, ElCid16 (96.80) wrote:

The current ratio includes all current assets, while the quick ratio removes slightly less liquid assets (like inventory).  So the current ratio will be higher than the quick ratio.

In regards to you question about management's investing decisions with that cash, you are diving into a much deeper discussion.  Corporate Strategy isn't something that can be explained in a single blog post.  Solid companies can have a wide range of current ratios.  Google's current ratio is like 5.5 (not for long), while PG's is less than 1.0.  However, both companies are viable investments, IMO.  Checking out the current ratio is about 1% of the legwork that should be done prior to making an investment.  Looking at what comprises the current assets and current liabilities might be 5% of the legwork.  It's not easy, partner.

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