What does a high current ratio indicate?

A high current ratio indicates a stronger ability to cover short-term obligations. The current ratio is calculated by dividing current assets by current liabilities, reflecting the liquidity position of a company. A higher current ratio suggests that a company has a significant amount of assets readily available to meet its short-term liabilities, which is important for maintaining smooth operations and ensuring that obligations such as suppliers, creditors, and short-term loans can be met without financial strain.

This measure is particularly key for assessing financial health in terms of short-term solvency. When businesses have a strong current ratio, it can indicate effective working capital management and a buffer for unexpected expenses or downturns in cash flow.

The other choices do not directly correlate with what a high current ratio indicates. Higher revenue generation and higher profitability focus on performance metrics rather than liquidity. Increased long-term investments relate to the long-term financial strategies of a business and do not provide insights into short-term financial health. Therefore, the correct interpretation of a high current ratio is its meaning for an entity's capability to cover immediate financial obligations.