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Liquidity, Profitability and Solvency Ratios of two companies

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A. Discuss the relative liquidity of the two companies.
B. Discuss the relative profitability of the two companies
C. Discuss the relative solvency of the two companies

Liquidity ratios Company A Company B
(1)Current ratio 1.26:1 1.22:1
(2)Quick (acid-test) ratio 0.81:1 0.61:1
(3)Current cash debt coverage 0.38:1 0.20:1
(4)Accounts receivable turnover 3.60 times 7.78 times
(5)Inventory turnover 6.39 times 5.30 times

Profitability ratios
(1)Asset turnover 0.93:1 1.29:1
(2)Profit margin on sales 7.35% 4.65%
(3)Return on assets 6.87% 6.02%
(4)Returrn on common
stockholders' equity 36.07% 18.59%
Solvency ratios
(1)Debt to assets 79.87% 74.87%
(2)Times interest earned 9.57 times 13.40 times

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Solution Summary

The solution computes the ratios and compares Company A to Company B with three paragraphs of narrative data.

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A. Discuss the relative liquidity of the two companies.

Liquidity ratios Company A Company B
(1)Current ratio 1.26:1 1.22:1
(2)Quick (acid-test) ratio 0.81:1 0.61:1
(3)Current cash debt coverage 0.38:1 0.20:1
(4)Accounts receivable turnover 3.60 times 7.78 times
(5)Inventory turnover 6.39 times 5.30 times

The liquidity of both companies is poor but company A has a relatively better liquidity than B. The current ratio of both is quite lower than the norm or around 1.6. ...

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