Principles of Supply Chain Management, Second Edition, 2nd Edition

534 Principles of Supply Chain Management

In all of the improvements in net income and cash ow projected from the changes

in working capital, it is interesting to observe what happens to the current ratio.

The current ratio—current assets divided by current liabilities—is one of the oldest

ratios used by creditors to decide whether the borrower is creditworthy. In Table 15.1,

as the management of working capital improves, the current ratio declines from a high

of 7.5–1.8, which normally indicates a deterioration of the company’s ability to repay

loans. In this case, the creditors need to understand that a decrease in the current

ratio does ...