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ACCA Strategic Professional · Advanced Performance Management · Financial performance measurement

An analyst compares two retailers. Retailer A has a current ratio of 0.6 and fast-moving inventory; Retailer B has a current ratio of 0.6 and slow-moving inventory. Which conclusion is most appropriate?

A low current ratio can be normal for the fast-turnover retailer because it converts inventory to cash quickly and relies on supplier credit, while the same ratio is more concerning for the slow-moving retailer. Ratios need industry and working capital cycle context.

  1. AA low current ratio may be normal for A because it collects cash quickly, but is more worrying for BCorrect
  2. BBoth face identical liquidity risk because ratios are equal
  3. CB is safer because slower inventory raises liquidity
  4. DA is in distress because any current ratio below 1 signals insolvency

Explanation

Ratios must be interpreted in context. Retailers with fast inventory turnover and cash sales often fund themselves from suppliers, so a low current ratio is sustainable. Slow-moving inventory means cash conversion is slower, making the same ratio riskier. Equal ratios do not imply equal risk.

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