What should be understood about a current ratio of 3.5 compared to the industry average of 2.0?

A current ratio of 3.5 indicates that for every dollar of current liabilities, the company has $3.50 in current assets. This is significantly higher than the industry average of 2.0, suggesting that the company has more than enough assets to cover its short-term obligations.

However, a current ratio that is disproportionately high can also imply potential issues. For instance, it may indicate that the company is not efficiently using its assets or managing its inventory. Excessive current assets could point to inefficiencies in converting those assets into cash or could signify that the company is holding too much inventory or accounts receivable. Hence, while a high current ratio typically signals good short-term financial health, it can also serve as a red flag for operational inefficiencies or other underlying problems that need to be addressed.