The higher current ratio is not a symbol of strength of a firm, rathe…

The higher current ratio is not a symbol of strength of a firm, rather it is the sign of:

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Under utilization of resources

The current ratio (current assets ÷ current liabilities) shows how well a firm can meet its short-term debts. A ratio around 2 : 1 is taken as safe. A ratio far above that means the firm has too much money locked up in current assets, such as idle cash, excess stock or slow-paying debtors, which could have been put to better use. That is why a very high current ratio is read as a sign of under utilisation of resources, not of strength.

Why the other options are incorrect

Option (1) Better Solvency position — Incorrect. A high ratio does show that current liabilities are well covered, but beyond a reasonable level the extra cover is idle money, not added strength. The question asks what the excess signals.
Option (3) Efficiency — Incorrect. Efficiency means resources are kept working. Idle cash and excess stock are the opposite of efficiency.
Option (4) Not able to pay dues on time — Incorrect. This is the danger of a low current ratio, where current assets are too small to meet current liabilities. A high ratio means more than enough to pay.

NCERT (2026-27 edition):
Current Ratio – “… Significance: It provides a measure of degree to which current assets cover current liabilities. The excess of current assets over current liabilities provides a measure of safety margin available against uncertainty in realisation of current assets and flow of funds. The ratio should be reasonable. It should neither be very high or very low. Both the situations have their inherent disadvantages. A very high current ratio implies heavy investment in current assets which is not a good sign as it reflects under utilisation or improper utilisation of resources. A low ratio endangers the business and puts it at risk of facing a situation where it will not be able to pay its short-term debt on time. If this problem persists, it may affect firm’s credit worthiness adversely. Normally, it is safe to have this ratio within the range of 2:1.”

The higher current ratio is not a symbol of strength of a firm, rather it is the sign of:

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Under utilization of resources

Why the other options are incorrect

Option (1) Better Solvency position — Incorrect. A high ratio does show that current liabilities are well covered, but beyond a reasonable level the extra cover is idle money, not added strength. The question asks what the excess signals.
Option (3) Efficiency — Incorrect. Efficiency means resources are kept working. Idle cash and excess stock are the opposite of efficiency.
Option (4) Not able to pay dues on time — Incorrect. This is the danger of a low current ratio, where current assets are too small to meet current liabilities. A high ratio means more than enough to pay.