Bluestone Metals, Inc., is a metal fabrication firm that manufactures prefabricated metal parts for customers in a variety of industries. The firm's motto is "If you need it, we can make it." The CEO of Bluestone recently held a board meeting during which he extolled the virtues of the corporation. The company, he stated confidently, had the capability to build any product and could do so using a lean manufacturing model. The firm would soon be profitable, claimed the CEO, because the company used state-of-the-art technology to build a variety of products while keeping inventory levels low. As a business press reporter, you have calculated some ratios to analyze the financial health of the firm. Bluestone's current ratios and quick ratios for the past 6 years are shown in the table below:
2010
Current Ratio 1.3
Quick Ratio 1.2
2011
Current Ratio 1.4
Quick Ratio 1.3
2012
Current Ratio 1.4
Quick Ratio 1.2
2013
Current Ratio 1.5
Quick Ratio 0.7
2014
Current Ratio 1.7
Quick Ratio 0.7
2015
Current Ratio 2.1
Quick Ratio 0.4
What do you think of the CEO's claim that the firm is lean and soon to be profitable? (Hint: Is there a possible warning sign in the relationship between the two ratios?)
A. The current ratio is increasing but the quick ratio is declining.
B. As with any analysis using ratios, you should investigate other financial ratios for Bluestone to further assess its financial health.
C. The current ratio provides a better measure of overall liquidity only when a firm's inventory cannot be easily converted into cash.
D. Since inventory is included in the calculation of the current ratio, but not in the quick ratio, the ratios indicate that inventory is increasing and Bluestone is not operating in a lean manufacturing mode.