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ACCA Strategic Professional · Strategic Business Leader · Financial analysis and decision-making techniques

Kestrel Foods plc reports revenue growth of 12% and a rise in operating profit margin from 8% to 10%. However, its current ratio has fallen from 1.6 to 0.9 and trade payable days have lengthened from 40 to 75 over the same period. Which interpretation is most appropriate for the board?

The board should investigate whether margin gains are being supported by stretching suppliers. A current ratio under 1 and payable days rising from 40 to 75 signal liquidity strain and supplier-relationship risk, so the profit improvement alone cannot be treated as sustainable performance.

  1. AProfitability gains are sustainable because margin improvement shows stronger pricing power
  2. BMargin gains may be partly funded by stretching suppliers, creating a liquidity and supply-chain risk that needs investigationCorrect
  3. CThe falling current ratio shows inventory is being managed more efficiently, so no concern arises
  4. DLonger payable days prove the company has improved its credit rating with suppliers

Explanation

Profit improvement alongside sharply lower liquidity and much longer payable days suggests the company may be financing operations through suppliers. This is a short-term funding and relationship risk, not proof of sustainable performance. Option A ignores the liquidity signals; D draws an unsupported conclusion.

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