How can a company improve its working capital ratio?

• A. By increasing current liabilities
• B. By decreasing current assets
• C. By increasing current assets relative to current liabilities
• D. By maintaining consistent dividend payments

Answer: (C)

Improving a company's working capital ratio, which is calculated by dividing current assets by current liabilities, primarily involves increasing the amount of current assets or decreasing current liabilities. The correct answer reflects a fundamental principle of financial management: a higher ratio indicates better liquidity and a stronger ability to meet short-term obligations.

When a company increases its current assets relative to its current liabilities, it strengthens its liquidity position. Current assets include cash, accounts receivable, and inventory, which are crucial for day-to-day operations. By enhancing the current assets, the company can ensure that it has sufficient resources to cover its immediate obligations, leading to improved financial stability and operational efficiency.

Increasing current liabilities, decreasing current assets, or maintaining consistent dividend payments does not effectively contribute to improving the working capital ratio. In fact, higher current liabilities without a corresponding increase in current assets can strain the liquidity position, while decreasing current assets diminishes the buffer against short-term debts. Maintaining consistent dividend payments, while important for shareholder relations, does not directly affect the working capital ratio and could potentially draw cash away from operational needs.