Answer to Question #57861 in Finance for abdiaziz

Question

Your company’s current ratio is 0.5x, while your competitor’s current ratio is 1.5x. Both
firms want to "window dress" the coming end-of-year financial statements. As part of
the window dressing strategy, each firm will double its current liabilities by adding
short-term debt and placing the funds obtained in the cash account. Describe the actual
results of these transactions.

Answer 1

The actual results of these transactions will be better for your competitor, because now your current debts are 3 times higher, then your current liabilities, which creates some risks for your company.
If a company increases its debt ratio, but leaves its operating income (EBIT) and total assets unchanged, the share of debt will increase without any improvements in other indicators, so the risks will increase.