Question

Compare and analyze ratios from both companies.

Dec 31 Dec 31, Dec 31, Dec 31, Dec 31, 2018 2017 2016 2015 2014 Current ratio 1.28 1.24 1.05 1.34 1.02 Quick ratio 0.66 0.90 0.98 0.89 0.81 Cash ratio 0.76 0.67 0.55 0.84 0.74 Dec 31 Dec 27, Dec 29, Dec 30, Dec 26, 2018 2017 2016 2015 2014 Current ratio 0.99 1.5 1.28 1.31 1.14 Quick ratio 105 0.82 1.29 1.08 0.85 Cash ratio 0.95 0.50 0.76 0.68 0.48

Answer 1

Current Ratio = Current Assets/Current Liabilities

Quick Ratio = Current Assets - Inventory/Current Liabilities

Cash Ratio = Cash + Marketable Securities/Current Liabilities

All the above ratios measures Short Term Liquidity.

They differ from each other on the basis of convervatism.

Cash ratio is the most conservative and Current ratio is the least conservative.

In given case,

2018: A has more current assets than liability than B. But high proportion of A's current assets includes inventories.Whereas cash is concerned, both are almost in the same position.

2017: Although B is in a better position, A will still be able to pay off all its liabilities at once, if required. If inventories is excluded, A won't be able to pay all its dues, unless other current assets are converted into cash. Whereas, B holds a lot in cash and marketable securities form, which can be instantly converted in cash.

2016: Both the companies are exactly in the same position. Except that, A holds marginally higher inventories, whereas, B holds marginally lower cash.

2015: Again, Both are almost in a same position, except, A has marginally higher cash.

2014: Same as 2015. But this time, B's cash and marketable securities ar significantly lower, nit enough to even pay off half of the dues.

Overall Summary:

(1) Both companies have been able to maintain a good current ratio of 1 to 1.5. Although a consistent ratio of above 1.5 or 2 would be better.

(2) Significant Amount of A's Current Assets includes Inventories which is not a very good sign of liquidity. It can take time for inventories to sell and distress sale might even fetch lower value, which can lead to liquidity crisis.

(3) Both have maintained a good cash ratio of 0.5 to 0.8

(4) Difference between quick ratio and cash ratio is very nominal for A whareas a bit higher for B. This indicates that B has more Account Receivables than A which can take time to recover. Even a few large debtors becoming vad debt would significantly affect B's liquidity.

(5) Overall, both companies' liquidity is Satisfactory in all 5 years, not very critical.