Current ratio "indicates the firm’s degree of liquidity by comparing its current assets to its current liabilities" (Petty, 2008). In other words, it's a firm’s market liquidity and ability to meet creditor’s demands, a generally good current ratio falls between 1.5 to 3 for a healthy company. However, high current ratio is not always necessary good, if the current ratio is too high, then the company may be inefficiently using its current assets or its short-term financing facilities. According to Lumen (n.d.), "[t]his may also indicate problems in working capital management." If the company is having problems recovering its dues from its debtors and the debtor cycle is negative. The debtors may be large due to delays in payment and that may be the reason for a high current ratio.Times interest earned ratio "measures a firm’s ability to meet its interest payments from its annual operating earnings" (Petty, 2008). In other words, it's an indication of a company's ability to continue to service its debt. A high ratio means that a company is able to meet its interest obligations because earnings are significantly greater than annual interest obligations. However, this is not always good, having a high times interest earned ratio also means that the company has an undesirably low level of leverage or pays down too much debt with earnings that could be used for other investment opportunities to get higher rate of return. This is why it's important to calculate times interest earned ratio, to see how your company perform to meet its debt obligations based on its current income. This help you indicate if there any room for growth as well as if your company under perform and facing potential bankruptcy.
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