PROBLEM #6 The following are selected ratios of two companies of similar size an
ID: 1124319 • Letter: P
Question
PROBLEM #6
The following are selected ratios of two companies of similar size and in the same industry: SAWICKI and POWER.
Ratios
SAWICKI
POWER
Accounts receivable turnover
6 times
5 times
Current ratio
1.50
1.80
Debt equity ratio
0.80
0.60
Inventory turnover
7.5 times
5 times
Quick ratio
0.80
0.82
Return on assets
8.1%
8.7%
Return on equity
14.6%
10.2%
Return on sales
3.25%
3.33%
Times interest earned
4
7
Total asset turnover
2.5
2.3
Required:
Which Company is more Liquid, i.e., can pay its bills from its operations with more ease and Why? Identify at least two ratios to support your analysis.
Which Company is more Solvent and Why? Identify at least two (2) ratios from above, to support your analysis.
If you have to choose One of these two Companies to invest your money as a Shareholder, which Company would you choose and Why? Identify at least two (2) ratios from above, to support your conclusion.
Ratios
SAWICKI
POWER
Accounts receivable turnover
6 times
5 times
Current ratio
1.50
1.80
Debt equity ratio
0.80
0.60
Inventory turnover
7.5 times
5 times
Quick ratio
0.80
0.82
Return on assets
8.1%
8.7%
Return on equity
14.6%
10.2%
Return on sales
3.25%
3.33%
Times interest earned
4
7
Total asset turnover
2.5
2.3
PROBLEM #6 imilar size and in the same The following are selected ratios of two companies of s industry: SAWICKI and POWER. Ratios SAWICKI POWER Accounts receivable turnover Current ratio Debt equity ratio Inventory turnover Quick ratio Return on assets Return on equi Return on sales Times interest earned Total asset turnover 6 times 1.50 0.80 7.5 times 0.80 8.1% 14.6% 3.25% 4 2.5 5 times 1.80 0.60 5 times 0.82 8.7% 10.2% 3.33% 2.3 Required: 1. Which Company is more Liquid, i.c., can pay its bills from its operations with more ease and Why? Identify at least two ratios to s analysis 2. Which Company is more Solvent and Why? Identify at least two (2) ratios from above, to support your analysis. 3. If you have to choose One of these Shareholder, which Company would you choose and Why? Identify at least two (2) ratios from above, to support your conclusion. two Companies to invest your money as aExplanation / Answer
1. Power is more liquid than Sawicki. This is because its current ratio and quick ratio is better than Sawicki. In terms of times interest earned, Power does better than Sawicki. So, its interest burden is covered by profits better than Sawicki,
2. Yet again Power is more solvent than Sawicki. This can be verified by looking at its debt-equity ratio which is lower for power than sawicki. Its times interest earned (or interest coverage ratio) is also better than Sawicki. Power has a higher times interest earned which means that net income is basically 7 times the interest payment.
3. The picture is not very clear here. In terms of ROE, Sawicki scores over Power. But, Power's ROA and Return on Sales is better than Sawicki. In terms of solvency and interest coverage ratio, power is better than Sawicki. However, Total Asset turnover and inventory turnover is better for Sawicki. Strictly using return ratios, Power scores over Sawicki.
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