Florida General Contractor Practice Exam

Which ratio is often favored by loan officers as a sign of financial health?

1. Debt to equity ratio

2. Current ratio

3. Quick ratio

4. Return on assets

The correct answer is: Current ratio

The current ratio is commonly favored by loan officers as an indicator of a company's short-term financial health. This ratio measures a company's ability to pay off its current liabilities with its current assets. A current ratio greater than 1 suggests that the company has more current assets than liabilities, which indicates good short-term financial stability and a lower risk of financial distress. Loan officers look for this ratio because it offers insight into liquidity and the company's capability to manage its short-term debt. If a company can easily convert itsassets into cash or has sufficient cash reserves to cover its near-term obligations, it is seen as a less risky investment for lenders. While other ratios, like the debt to equity ratio, the quick ratio, and return on assets, provide valuable insights into different aspects of financial health, the current ratio is specifically focused on liquidity and immediate financial wellbeing, which are paramount for loan officers when assessing risk in lending scenarios.