DFS June 08 Current ratio question

reddwarf

Does anyone want to tell me how to improve the current ratio (i totally understand why at this point you may not want to tell me!!) - Dec 08 DFS, task 2.1 (d) make one suggestion as to how each ratio might be improved..

the model answer does not make a suggestion .....

quote ..the company has poorer liquidity this year than last. the current ration has fallen despite in increased inventories which means a decrease in cash or near cash current assets. The quick ratio shows relatively less (should say fewer!) quick assets to meet current liablities. The main worry would seem to be (hmm on the fence or what!) the large increase in the overdraft.unquote

I put increase sales or reduce liabilites eg. overdraft!!

A-Vic

reddwarf wrote: »

Does anyone want to tell me how to improve the current ratio (i totally understand why at this point you may not want to tell me!!) - Dec 08 DFS, task 2.1 (d) make one suggestion as to how each ratio might be improved..

the model answer does not make a suggestion .....

quote ..the company has poorer liquidity this year than last. the current ration has fallen despite in increased inventories which means a decrease in cash or near cash current assets. The quick ratio shows relatively less (should say fewer!) quick assets to meet current liablities. The main worry would seem to be (hmm on the fence or what!) the large increase in the overdraft.unquote

I put increase sales or reduce liabilites eg. overdraft!!

maybe they have ordered to much stock of materials and there creditors have increased - the possible suggestion while their liquidity is so low they could reduce there stock or change there stock holding possition to just in time? not seen the paper but poor liquidity could suggest this

reddwarf

I found this, I don't think the question on how to improve this ratio was well thought out on the AAT's part...

The current ratio is definitely a convenient and mostly reliable tool measuring a company's level of liquidity. But, the variety of factors which affect it, suggests that one must be careful not to place too much trust in what the ratio seems to tell for the future. An analyst needs to predict the future. A current ratio is a static measure based on balance sheet amounts. To gain more insight, the analysis must always be done on a comparative basis over time. Deteriorating sales translate into mounting inventories, slow paying customers result in growing receivables. Both of these improve the current ratio. Thus, the current ratio is a poor predictive tool.