In: Accounting
1. compare the two companies and explain its Liquidity, Efficiency, profitability, solvency and Dupont ratios. which among the two companies showed better performance and show comparative advantages. (300 words please)
Answer:-
The liquidity ratios are a result of dividing cash and other liquid assets by the short term borrowings and current liabilities. The common examples of liquidity ratios include current ratio, acid-test ratio, and working capital ratio.
Its advantages help to understand the strength of the company. It shows how quickly a company can pay off its debt. It helps to understand how quickly a company can convert its inventories into cash. It helps to understand how much cash or current assets you will need if the company is in deficit.
Liquidity ratios examine whether a business has enough money to pay the money it owes
profitability ratios to measure the overall profitability of the company considering all direct as well as an indirect cost. A high ratio represents a positive return in the company and the better the company is. Formula: Net Profit ÷ Sales × 100. Net Profit = Gross Profit + Indirect Income or Indirect Expenses.
One of the comparative advantages is profitability metrics are a return on equity (or ROE for short). Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet.
The solvency ratio indicates whether a company's cash flow is sufficient to meet its short-and long-term liabilities.
The advantage is acceptable solvency ratios vary from industry to industry, but the general rule of thumb, a solvency ratio of greater than 20% is considered financially healthy. The lower a company's solvency ratio, the greater the probability that the company will default on its debt obligations.
Dupont ratios are equal to profit margin multiplied by asset turnover multiplied by financial leverage. Debt-to-Equity Ratio. The debt-to-equity ratio is a quantification of a firm's financial leverage estimated by dividing the total liabilities by stockholders' equity.