Question

You are the loans manager at a local bank. Two companies have approached you about securing a 6-month loan. Based on your calculations, please comment on the following:

Asses and comment on the Liquidity Ratio, Solvency Ratio and Profitability ratio. Which company would you prefer to give the loan and explain why.

Liquidity
Working Capital:	Company 1	Company 2	Which is better?
	897	420
Current Ratio:
	1.40	1.16
Quick Ratio:
	1.16	0.95
Receivable Turnover:
	12.44	7.76
	times	times
Average Collection Period:
	29.33	47.03
	days	days
Inventory Turnover:
	4.06	4.06
Days in Inventory:
	89.90	89.93
Solvency
Debt to Total Assets:
	0.54	0.73
Times Interest Earned
	9.89	3.88
Debt to Total Equity:
	1.18	2.68
Profitability
Profit Margin:
	0.20	0.03
Return On Assets (ROA):
	7%	1%
Asset Turnover:
	0.35	0.25
Earnings Per Share:
	26.30	2.24
Price Earnings:
	1.71	8.93
Return on Common Shareholder's Equity
	1.04	0.08

Answer 1

Company 1 is the better company than company2 because of following reasons;

1. When compare Liquidity ratios

a. Working capital, Current ratio, quick ratio are more than company 2

b. Average collection period of company 1 is less than company 2

2. When Compare Solvency ratios

a. Debt to asset and debt to equity ratio is lower than company 2 means lower debt means having higher credit score.

b. Time interest earned is more than company 2

3. When compare Profitability ratios

a. Higher profit margin, return on assets, assets turnover and EPS means company 1 has higher turnover or higher profit than company 2.

b. Except Market price the company1’s is less than company 2.