I got this one right, but wouldn’t a Higher average trade payables indicate better liquidity. Higher average trade payables means more accounts are being collected right? Alton Industries will have better liquidity than its peer group of companies if its: A) quick ratio is lower. B) average trade payables are lower. C) receivables turnover is higher. D) ROA is higher. Your answer: C was correct! Higher receivables turnover is an indicator of better receivables liquidity since receivables are converted to cash more rapidly. A lower quick ratio is an indication of less liquidity. Lower trade payables could be related to better liquidity, but could also be consistent with very poor liquidity and a requirement from its suppliers of cash payment. ROA is not a liquidity measure.
According to your post, B states average trade payables are lower, not higher. If they are lower, you are getting less trade credit and therefore have worse liquidity. I think you’ve got the right thinking, just misread the answer.
yeah but it says in the answer “Lower trade payables could be related to better liquidity, but could also be consistent with very poor liquidity and a requirement from its suppliers of cash payment.”
Company could be really stretched thin in cash coupled with longer receivables outstanding and in an attempt to offset that, try to extend trade payables. This could point out to poor liquidity, and this situation won’t persist for long.
Sconnery, > Higher average trade payables means more accounts are being collected right? trade payable is accounts payable, not accounts receivable.