Accounting · Ratio Analysis
A retail chain, UrbanStyle Ltd, has shown a steady increase in its Current Ratio over three years from 1.2 to 1.8 to 2.4. However, during the same period, its Cash Flow from Operations turned negative, and the Debtors Turnover Ratio dropped from 10 times to 4 times. What is the correct financial assessment of this scenario based on ratio interlinkages?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The company is managing its working capital efficiently by expanding credit terms to capture market share.
- 2The negative cash flow is temporary and should be ignored since the current assets are substantially growing.
- 3The situation is alarming because the increase in the Current Ratio is likely due to an accumulation of 'sticky' or uncollectible receivables rather than actual liquidity.✓
- 4The liquidity position is strengthening as the rising Current Ratio provides a better cushion for short-term creditors.
Correct answer
The situation is alarming because the increase in the Current Ratio is likely due to an accumulation of 'sticky' or uncollectible receivables rather than actual liquidity.
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