Question

c) How does Chem-Med’s current ratio for 20XW compare to Pharmacia’s? How does it compare to the industry average? Compute Chem-Med’s current ratio for 20XZ. Is there any problem with it?.

Chem-Med’s Current ratios:

Year 20XW

20XZ

$ in thousands

Other related data for comparison:

Year Pharmacia Inc. 20XW 2.8 times

Current Assets / $1720 $593

Current ratio 2.9 times

1.98 times

Current Liabilities $3261 $1647

Industry average 2.4 times

This shows that Chem-Med’s current assets have the capacity to cover more than twice its outstanding current obligations. Furthermore, its current ratio is 0.10 times higher as compared to Pharmacia Inc. Chem-med’s current ratio is 0.50 times well above the industry average.

Answer 1

Current Ratio measures short-term liquidity of a firm , or short term debt paying capacity of anorganization. The ideal Current Ratio is 2:!. This ratio indicates that company has enough cash to meet its obligation.

However, a firm with higher ratio has better liquidity which indicates that form is better equipped to meet short term obligations such as payment for raw materials, short term loans etc.

Current Ratio for 20XZ as per given information is 1.98 :1, which is considered safe.

Current Ratio can be computed as = Current Assets / Current Liabilities

Chem Meds Calculation of Current Ratio for 20XZ

Here current assets = $593

Current Liabilities = $1647

Current Ratio = 593 / 1647

= 0.36:1

Current Ratio less than 1 indicates that a form might have problem meeting short-term financial obligations.