Question

KRJ Enterprises reported a current ratio of 1.5 last year and 2.1 this year. It reported a quick ratio of 1.1 last year and 1.8 this year. At the same time its days' sales in receivables increased from 32 days to 41 days and its days' sales in inventory remained constant at 72 days. What is the most likely conclusion an analyst would make about the company's liquidity?

		Because both its current ratio and its quick ratio increased, the company is more liquid.
		Because of the mixed signals of having both the current ratio and quick ratio increase at the same time, one would need additional information before making any initial conclusion about the company's liquidity.
		Because both its current ratio and its quick ratio increased, the company is less liquid.
		None of the choices are correct.
		Although its current and quick ratio have both increased, the company may actually be less liquid due to the large increase in accounts receivable outstanding.

Answer 1

Although its current and quick ratio have both increased, the company may actually be less liquid due to the large increase in accounts receivable outstanding.

An increase in accounts receivable outstanding is an indication of cash flow problems, and the company needs to pay attention to its liquidity position.

Though current ratio and quick ratios have increased, they are not a complete indication of liquidity, since they have accounts receivable ingrained in them.