In trend analysis, which ratio should decrease?

• A. Liabilities to Net Worth
• B. Current Ratio
• C. Net Profit Margin
• D. Gross Margin

Answer: (A)

In trend analysis, you’re looking for signs of the financial structure improving over time and reducing risk. A key indicator of that improvement is leverage, which is shown by liabilities relative to net worth. If a company finances more with its own equity or pays down debt, the liabilities-to-net-worth ratio falls. A decreasing ratio means the firm is less indebted for each dollar of equity, signaling stronger solvency and lower financial risk — a favorable sign for lenders and stakeholders.

For context, the other ratios don’t have a single direction to expect from trend analysis: the current ratio depends on liquidity management and can go up or down; net profit margin and gross margin are influenced by pricing, costs, and volume and likewise don’t have a universal trend. A concrete example: if liabilities drop from 600k to 400k and net worth rises from 300k to 500k, the ratio falls from 2.0 to 0.8, illustrating improved leverage.