Final answer:
A decreasing current ratio might indicate a firm's worsening liquidity, potential difficulty in managing working capital, or a strategic choice due to high profits or lower interest rates. It's essential to analyze further financial information for a precise conclusion.
Step-by-step explanation:
When observing a firm whose current ratio is decreasing over time, one can infer several things. The current ratio, which is a liquidity ratio that measures a company's ability to pay short-term obligations, is calculated by dividing current assets by current liabilities. A decreasing current ratio could indicate that the firm's liquidity is worsening, which might be due to an increase in short-term debts, a decrease in current assets, or a combination of both. It can also suggest that the firm is utilizing its current assets to finance growth or that it's encountering difficulties in managing its working capital efficiently.
However, the interpretation should be made with caution because a decreasing current ratio doesn't always mean that the firm is heading towards financial distress. For instance, if the borrower is a firm with a record of high profits, it might still be capable of repaying its short-term liabilities easily. It can also be strategic—for instance, if interest rates in the economy have fallen, a firm might choose to finance itself with cheaper debt rather than rely on its current assets. A deeper analysis of the firm's other financial information and business context is necessary to draw a more precise conclusion.