Question

pally is using leverage more effectively? Explain. The The following ratios are available for Rogers Communications Inc. and Shaw Communications Inc. PI8- for a recent year: ns Inc. and Shaw Communications Inc. Evaluate ratios. (LO 4,5,6) AN Rogers Shaw 0.48:1 0.36:1 0.81:1 8.3 times 10.7 times 0.95:1 Liquidity Current ratio Acid-test ratio Receivables turnover Solvency Debt to total assets Interest coverage Profitability Profit margin Asset turnover Return on assets Return on equity 79.3% 3.3 times 63.7% 5.5 times 10.4% 0.5 times 5.4% 26.4% 16.9% 0.4 times 6.8% 19.0% Instructions (a) Which company is more liquid? Explain. (b) Which company is more solvent? Explain. (c) Which company is more profitable? Explain. TAKING IT FURTHER Rogers' price-earnings ratio is 17.4 times, compared with Shaw's price-earnings ratio of 13.7 times. Which company do investors favour? Is your answer consistent with your analysis of the two compa. nies' profitability in part (c)?

Answer 1

Part A:

Answer (a):

Shaw is more liquid. Shaw's liquidity ratios are better as compared to Roger's.

Shaw's current ratio is higher at 0.95 as compared to Roger's current ratio of 0.48.

Shaw's acid-test ratio is higher at 0.81 as compared to Roger's acid-test ratio of 0.36

Shaw has better receivable turnover at 10.7 as compared to Roger's receivable turnover of 8.3

Answer (b):

Shaw is more solvent.

Shaw's debt to total asset ratio is lower at 63.7% as compared to Roger's debt to total asset ratio of 79.3%.

Shaw has better interest coverage of 5.5 times as compared to Roger's interest coverage of 3.3 times.

Answer (c):

Shaw is more profitable.

Shaw's profit margin is better at 16.9% as compared to Roger's profit margin of 10.4%

Shaw's return on asset is better at 6.8% as compared to Roger's profit margin of 5.4%. This is in spite of Shaw having a lower asset turnover.

On return of equity Rogers is better at 26.4% as compared to Shaw's ROE of 19.0%. But this is due to higher leverage of Rogers.

Part B:

Investor may favor Rogers since it is having a higher price earning ratio. Investors favors higher P/E ratio, since companies having higher P/E ratio is expected to have higher growths. But this may not always be true. A price earning ratio could be due to the fact that share is overvalued. Rogers is highly levered.