In reading 27 concerning the first case study. The author says that the company’s working capital ratio is declining but after examining the a/r and inventory it is positive since they are turning over faster which is why current assets is dropping at faster rate than current liabilities. My question is if a/r and inventory is turning over faster shouldn’t that increase cash for the company? So current assets wouldn’t be affected? Thanks, please help me understand!
Not sure If I understood correctly.
The author is saying that working capital ratios deteriorated because of high current liabilities in 2007 compared to 2006. If you look at Exhibit 3, current assets remained same., but current liabilities significantly increased.
The rate of management’s efficiency in WC management (yes, cash will increase when a/r is managed well) is still not enough to cover the speed of current liabilities increase.