In trend analysis, which ratio should increase?

• A. Current Ratio
• B. AR Turnover
• C. Inventory Turnover
• D. Liabilities / Net Worth

Answer: (A)

Trend analysis looks at how financial ratios move over time to reveal patterns in a company’s financial health. The current ratio, which compares current assets to current liabilities, specifically measures short-term liquidity—the ability to cover upcoming obligations. When this ratio trends upward, it indicates an improving liquidity cushion, meaning the company has more current assets relative to what it owes in the near term. That upward trend is generally seen as a positive signal in trend analysis because it reduces the risk of liquidity problems.

AR turnover and inventory turnover are efficiency measures. They can rise if collections speed up or inventory moves faster, but their direction isn’t universally prescribed by trend analysis; changes depend on operational factors and may go up or down. The liabilities to net worth ratio tracks leverage; increasing leverage implies more debt relative to equity, which typically signals greater financial risk and is not a desirable upward trend.

So, the ratio whose trend is generally expected to increase as liquidity improves is the current ratio.