Question

P18-10B The following ratios are available for Rogers Communications Inc. and Shaw Communications Inc. Evaluat for a recent year: (LO 4, Liquidity Rogers Shaw Current ratio 0.48:1 0.95:1 Acid-test ratio 0.36:1 0.81:1 Receivables turnover 8.3 times 10.7 times Solvency Debt to total assets 79.3% 63.7% Interest coverage 3.3 times 5.5 times Profitability Profit margin 10.4% 16.9% Asset turnover 0.5 times 0.4 times Return on assets 5.4% 6.8% Return on equity 26.4% 19.0% Instructions (a) Which company is more liquid? Explain. (b) Which company is more solvent? Explain. (c) Which company is more profitable? Explain. price-earnings ratio is 17.4 times, compared with Shaw's price-earnings ratio of in investors favour? Is your answer consistent with your analysis of the two compa- 13.7 times. Which company do investors favour? Is your answer consistent wit nies' profitability in part (c)?

do part a),b),c) & Taking it further

Answer 1

a. Shaw is more liquid.

Current Ratio = Total Current Assets / Total Current Liabilities

Current ratio, as a measure of liquidity, indicates the ability of the firm to pay its short term obligations when they fall due. As the current ratio for Shaw is higher, it is more liquid than Rogers.

Acid Test Ratio = ( Total Current Assets - Inventory ) / Total Current Liabilities

The acid test ratio is a more stringent test of liquidity, where relatively less liquid current assets like inventory, are not considered in the numerator. Shaw leads.

Receivables Turnover = Net Credit Sales / Average Accounts Receivable.

This ratio too is a measure of liquidity, in the sense that it indicates how briskly accounts receivable get converted into cash. Shaw has a higher receivables turnover than Rogers, indicating that its average collection period is lower than Rogers.

b. Solvency indicates liquidity in the long term.

Again Shaw scores over Rogers, as its debt to total assets is lower, and its interest coverage is higher.

c. Though profit margin and return on assets for Shaw are higher, Rogers has higher return on equity. That is not surprising, as the equity multiplier of Rogers is higher due to higher debt to assets. Therefore, though Shaw has better expense management, Rogers has better asset turnover and higher financial leverage leading to a higher ROE.

Therefore, Rogers is more profitable.

Taking it further:

Investors would prefer Rogers, as a higher price earnings ratio indicates that investors expect higher earnings.

Yes, it is consistent. Higher return on equity translates into higher earnings per share for the stockholders.A higher financial leverage for Rogers means that its equity base is smaller, generating higher earnings per share