Question

1. Given below are some of the ratios for the year 2012 for Two Store A and B.

Ratios	Store A	Store B	Industry Average
Current	2.96:1	2.05:1	1.70:1
Acid-Test	1.02:1	1.34:1	0.75:1
Accounts receivable turnover	8 times	10 times	12 times
Inventory turnover	4.5 times	6 times	10 times

Ａ. Comment on the current ratio of Store A and B.

B. Comment on the acid test ratio of Store A and B.

C. Comment on the accounts receivable turnover ratio of Store A and B.

D. Comment on the Inventory turnover ratio of Store A and B.

E. Comment on the overall liquidity of both the stores.

2. The price earnings ratio measured as Market price per share of stock divided by Earnings per share is 12.4 times for Store A for the year 2009 whereas Store B price earnings ratio is 10.4 times for the same period. The industry average is 21.3 times. Comment on the price earnings ratio of both Store A and B.

3. The Times interest earned ratio measured as Net income before interest and taxes divided by interest is 9.6 times for Store A for the year 2009 whereas Store B times interest earned ratio is 2.9 times for the same period. The industry average is 16.1 times. Comment on the time interest earned ratio of both Store A and B.

Answer 1

A. Both the stores have higher current ratio compared to the industry average. In the case of stock - A for ever $1 current liability there is current asset backing of $ 2.96. Such a high ratio assures liquidity but can hinder profitability.

B. In the case of acid test ratio also we see the same trend. Both companies have higher ratios than Industry. But Store - B is having more acid test ratio. This may be due to heavy inventory levels in stores - A. Thus in terms of absolute liquidity, stores - B had better advantage.

C. Both the companies have poor Receivables turn over ratios. Liquidity cannot be guaranteed unless we have better receivables turnover. Store - B had comparatively better but near the industry mark.

D. In terms of Inventory turnover also trend seems same. Both companies have very below industry average. Position of stores - B in comparision with store - A is better.

E. Even when, current ratio had indicated a good liquidity, both firms failed in remaining key tests. So on comparative basis the overall liquidity is good with Stores - B

Question - 2

Fundamentally we look for companies with high P/E ratio. Results are indicating that both companies are far away from industry average. Store - A value at 12.4 times is a bit better than store - B 10.4 times.

Question - 3

Times interest earned measures the coverage or safety available to lenders of debt for their interest. Both firms are laging behind the Industry average. But Stores -A is much better than stores - B.