Question

WHC, SRG and MRR are three different companies but follow similar business models. Analyse the liquidity risk exposure and solvency risk exposure for these three firms between 2018 and 2019.

	WHC		SRG		MRR
	2019	2018	2019	2018	2019	2018
Current ratio	2.4	2.3	1.9	0.9	1.9	1.1
Quick ratio	1.7	1.6	0.7	0.6	0.9	0.7
Days accounts receivable outstanding	2	4	37	37	38	37
Days inventory held	72	61	71	68	73	70
Days accounts payable outstanding	26	22	44	38	44	38
Liabilities to assets ratio	0.591	0.469	0.495	0.497	0.495	0.497
Liabilities to shareholders’ equity ratio	1.443	1.448	0.979	0.999	0.979	0.999
Long term debt to long-term capital ratio	0.454	0.461	0.120	0.131	0.140	0.151
Long term debt to shareholders’ equity ratio	0.831	0.855	0.136	0.151	0.136	0.151
Interest coverage ratio	7.2	7.6	17	17.3	19	18.3

Answer 1

	WHC
	2019	2018
Liquidity (Short-term solvency)ratios
Current ratio	2.4	2.3	Capacity to meet operating obligations almost same in both the years
Quick ratio	1.7	1.6	Capacity to meet even -more short-term operating obligations with more cashable assets improved very- marginally in 2019
Days accounts receivable outstanding	2	4	No.of days taken to collect sales has improved further
Days inventory held	72	61	Deteriorated in 2019, ie. Conversion of inventory to sales takes more no.days in 2019
Days accounts payable outstanding	26	22	Trade credits usage improved in 2019, leaving more interest-free cash for circulation within.
Solvency(Long-term solvency )Ratios
Liabilities to assets ratio	0.591	0.469	Financing of assets with outside liabilities increased in 2019---increase in total liabilities
Liabilities to shareholders’ equity ratio	1.443	1.448	Financing of assets with current & non-current liabilities compared to equity , differ marginaly.
Long term debt to long-term capital ratio	0.454	0.461	Indicates increase of equity financing in 2019---LT debt has reduced more in proportion to current liabilities---given the increase in liabilities/assets ratio in 1. above
LT debt to shareholders’ equity ratio	0.831	0.855	Indicates increase of equity financing in 2019---LT debt has reduced---given the increase in liabilities/assets ratio in 1. above
Interest coverage ratio	7.2	7.6	Despite decrease in debt, interest expenses coverage by EBIT has marginally decreased --meaning decreased EBIT in 2019
	SRG
	2019	2018
Liquidity (Short-term solvency)ratios
Current ratio	1.9	0.9	Capacity to meet operating obligations improved in 2019
Quick ratio	0.7	0.6	Capacity to meet even -more short-term operating obligations with more cashable assets   improved marginally in 2019
Days accounts receivable outstanding	37	37	No.of days taken to collect sales , is maintained at same level
Days inventory held	71	68	Deteriorated in 2019, ie. Conversion of inventory to sales takes more no.days in 2019
Days accounts payable outstanding	44	38	Trade credits usage improved in 2019, leaving more interest-free cash for circulation within.
Solvency(Long-term solvency )Ratios
Liabilities to assets ratio	0.495	0.497	Financing of assets with outside liabilities is maintained at same ratio
Liabilities to shareholders’ equity ratio	0.979	0.999	Financing of assets with current & non-current liabilities compared to equity has marginally decreased in 2019.
Long term debt to long-term capital ratio	0.12	0.131	Indicates increase of equity financing in 2019---LT debt has reduced---corroborates the above ratio
LT debt to shareholders’ equity ratio	0.136	0.151	Indicates increase of equity financing in 2019---LT debt has reduced---corroborates the above ratio
Interest coverage ratio	17	17.3	Despite decrease in debt, interest expenses are covered the same no.of times by the EBIT--means decreased EBIT in 2019
	MRR
	2019	2018
Liquidity (Short-term solvency)ratios
Current ratio	1.9	1.1	Capacity to meet operating obligations improved in 2019
Quick ratio	0.9	0.7	Capacity to meet even -more short-term operating obligations with more cashable assets also   improved   in 2019
Days accounts receivable outstanding	38	37	No.of days taken to collect sales , is maintained almost at same level
Days inventory held	73	70	Deteriorated in 2019, ie. Conversion of inventory to sales takes more no.days in 2019
Days accounts payable outstanding	44	38	Trade credits usage improved in 2019, leaving more interest-free cash for circulation within.
Solvency(Long-term solvency )Ratios
Liabilities to assets ratio	0.495	0.497	Financing of assets with outside liabilities marginally decreased in 2019
Liabilities to shareholders’ equity ratio	0.979	0.999	Financing of assets with current & non-current liabilities compared to equity has marginally decreased in 2019.
Long term debt to long-term capital ratio	0.14	0.151	Indicates increase of equity financing in 2019---LT debt has reduced---corroborates the above ratio
LT debt to shareholders’ equity ratio	0.136	0.151	Indicates increase of equity financing in 2019---LT debt has reduced---corroborates the above ratio
Interest coverage ratio	19	18.3	Due to decrease in debt, interest expenses coverage by the EBIT has increased in 2019

To summarise

In all the three firms,

Liquidity (Short-term solvency) risk exposure

Capacity to meet the current , less-than-a year operating obligations has improved, though , marginally in 2019---- as ssen by current & quick ratios

All the three firms increasingly use their trade credits, in 2019--as seen by increased payable days

Receivable days are also improving , giving more cash for circulation.

The only risky area is inventory conversion to sales, which unnecessarily locks up otherwise-profit-earning funds.

Solvency(Long-term solvency ) risk exposure

All the three firms, show decrease in deployment of long-term debts & consequent improved (though small) interest coverage ratios.

so, exposure to interest & principal repayment risks are also marginally reduced.

All employ more of equity financing of assets, in general, with WHC relying marginally more on current liabilities(increased liabilities/assets ratio in 2019)