A higher current ratio always means better liquidity. True or false?

The current ratio (Current Assets / Current Liabilities) is a liquidity ratio that measures a company's ability to pay off its short-term obligations with its short-term assets. While a healthy ratio is generally good, its interpretation requires nuance.

• FALSE is the correct answer. A higher current ratio does not *always* mean better liquidity. An excessively high ratio might indicate inefficient use of assets, such as holding too much inventory (some of which could be obsolete or slow-moving) or too much idle cash that could be invested more productively. For instance, a company with a very high current ratio due to a large amount of unsaleable inventory might appear liquid on paper but actually face significant challenges in converting those assets to cash. The quality and composition of current assets are crucial.
• TRUE is incorrect because it overlooks situations where an excessively high ratio signals inefficiency or poor asset management.
• Depends on industry is incorrect as the fundamental principle that an 'always' statement is false due to potential inefficiencies applies across industries, even if industry benchmarks vary.
• Only for small firms is incorrect; the principle applies to firms of all sizes.