What is the ideal Current Ratio of a company?

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The current ratio is a financial measure that assesses the ability of a company to meet its short-term obligations by comparing its current assets to its current liabilities. It serves as an indicator of the safety margin available to cover uncertainties in asset realization and cash flow. Maintaining a reasonable current ratio is crucial. An excessively high ratio indicates that a significant portion of resources is tied up in current assets, which may suggest underutilization or mismanagement of resources. On the other hand, an overly low ratio puts the business at risk of not being able to meet its short-term debts on time, potentially harming its creditworthiness. Ideally, the current ratio should fall within a range of 2:1, striking a balance between having enough liquidity to cover obligations and avoiding inefficient use of resources. By achieving a suitable current ratio, a company can ensure better financial stability and flexibility to navigate through various economic conditions.