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Liquidity, Profitability and Solvency Ratios of two companies

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

Solution Preview

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. ...

Solution Summary

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

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