If a company's current ratio is 0.8, what does this indicate about its short-term liquidity?

• A. The company has stronger short-term liquidity than 2.0.
• B. The company has enough current assets to cover current liabilities.
• C. The company may have liquidity risk because current assets are less than current liabilities.
• D. The company has no current liabilities.

Answer: (C)

Interpreting the current ratio shows how well a company can meet its short-term obligations by comparing what it owns in the near term to what it owes in the near term. A current ratio of 0.8 means current assets are 80% of current liabilities, so current liabilities exceed current assets by 20%. This suggests the firm may struggle to cover its short-term obligations if they come due, indicating potential liquidity risk. In contrast, a ratio of 2.0 would reflect much stronger liquidity, and having no current liabilities would not be meaningful in this context. So a 0.8 ratio points to liquidity risk.