Black Sparrow Aviation, Inc. has been reviewing more of their financial ratios and noticed an increase in the ratio of current assets to total assets. They also noticed a decrease in profit and risk as measured by working capital. Senior management has come to you, the financial manager, to try to get an understanding of what is happening.
Explain the following:
1. Why does an increase in the ratio of current assets to total assets decrease profits as measured by working capital?
2. Why does an increase in the ratio of current assets to total assets decrease risk as measured by working capital?
3. How do changes in the ratio of current liabilities to total assets affect profitability and risk?
4. What recommendations do you make to help alleviate some of management's concern about the increase of current assets to total assets?