Question

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Problem 17-4A Ratio analysis L02,4 North Exploration Inc. and Eagle Minerals Inc, are similar firms that operate The following information is available: Eagle Minerals Inc. North Exploration Inc. 2016 2015 2017 20172016 2015 1.8 1.1 1.9 1.2 2.2 1.3 3.3 2.9 2.8 2.6 2.0 1.7 Quick ratio 15.2 13.0 16.0 12.6 turnover.. 30.5 25.2 29.2 24.2 21.917.1 16.4 14.5 Working capita.... $65,000 $53,000 $47.000 $126,000 $98.000 $73.000 Required The controller of your company has asked you to analyze the above two companies, so a deci- sion can be made on whether you should invest in either. Prepare a paragraph on each of the below items that you can give to the controller in a memo. Compare the current ratios and quick ratios and discuss. b. Discuss the working capital for each and which company may have greater liquidity. c. Compare the receivable and inventory turnovers d. How might obtaining industry standards affect the decision? a.

Answer 1

	north exploration	Eagel minerals	better
current ratio & quick ratio	Liquidity position of north exploration seems better as its current ratio and quick ratios is nearby ideal current ratio of 2 and quick ratio of 1 and it is improved over the years.	Liquidity position of egal resources seems getting worse as its current ratio and quick ratios is getting very far from ideal current ratio of 2 and quick ratio of 1 and it is increasing over the years which simply means heavy investment in working capital means mismanagement of funds into working capital	north exploration is better on liquidity
working capital	it show moderate investment in current assets and liabilities both because investment in working capital is not increasing very sharply	Investment in current assets has increased significantly which show huge investment in working capital	north exploration is better on liquidity
Accounts receivable turnover ratio	it is also same throughout the all three years	it is also same throughout the all three years	both are equiavlent
Inventory turnover ratio	It has increased over the years shows a better utilization of inventory to generate sales revenue	It is increased slowly and show not much better effective use of inventory in generating sales revenue	north exploration is better on liquidity
Industry average will provide an standard against which performance can be compared along with between the firm