Question

Ratios Thomas Edison Quick ratio 0.32 0.78 Cash debt coverage 0.56 0.53 Current cash debt coverage 0.56 1.38 Current ratio 0.41 1.03 Financial leverage 1.79 2.07 Total·liabilities-to-equity 79% 107% Profit margin 14.67% 18.27% Return on assets 16.60% 25.00% Return on equity 29.65% 51.80% Based on the ratios, which of the companies (Thomas or Edison) is most liquid, most solvent? Select one: a. Thomas is most liquid and most solvent O b. Edison is most liquid and most solvent c. Thomas is most liquid; Edison is most solvent O d. Edison is most liquid; Thomas is most solvent

A brief explanation would be very helpful, thanks!

Answer 1

The term Liquidity and short term solvency are used synonymously. Liquidity or short term solvency means ability of the business to pay its short term liabilities. Inability to pay short term liabilities affects its credibility as well as its credit rating. Short term lenders and creditors of a business are very much interested to know its state of liquidity because of their financial stake. Both for lack of sufficient liquidity and excess liquidity is bad for the organisation.
Solvency ratio indicates a company's viability in long term. These ration indicates the mix of funds provided by owner and lenders and assure the lenders of the long term fund with regards to periodic payment of interest during the period of the loan and repayment of principal amount of loan on maturity. These ratio compare the debt of a company with its equity, earnings and assets.
Ratios	Thomas	Edison	Interpretation	Types of Ratio	Remarks
Quick Ratio	0.32	0.78	It measures the ability to meet current debt immediately. Ideal ratio is 1. A company that has a quick ratio of less than 1 may not be able to fully pay off its current liabilities in the short term, while a company having a quick ratio higher than 1 can instantly get rid of its current liabilities	Liquidity Ratio	Since the Quick Ratio of Edison is higher than Thomas. Edison is more liquid than Thomas
Cash Debt Coverage	0.56	0.53	The cash debt coverage ratio measures a company's ability to pay off all of its liabilities with cash from operations. A debt coverage of over 1.5 is considered a good ratio	Liquidity Ratio	Since the Cash Debt Coverage Ratio of Thomas is higher than Edison. Thomas is more liquid than Edison
Current Cash Debt Coverage	0.56	1.38	A higher Current cash debt coverage ratio indicates a better liquidity position. Ideal ratio is 1:1	Liquidity Ratio	Since the Current Cash Debt Coverage Ratio of Edison is higher than Thomas. Edison is more liquid than Thomas
Current Ratio	0.41	1.03	A simple measures that estimates whether the business can pay short term debt	Liquidity Ratio	Since the Current Ratio of Edison is higher than Thomas. Edison is more liquid than Thomas
Financial Leverage	1.79	2.07	Financial leverage ratios measure the overall debt load of a company and compare it with the assets or equity. The lower the debt-to-equity ratio, the better is the company’s health, since funding by shareholders and other investors is often seen as better than funding by banks and other creditors	Solvency Ratio	Since the Financial Leverage Ratio of Thomas is lower than Edison. Thomas is more solvent than edison
Total-liabilities-to-equity	79%	107%	The debt-to-equity (D/E) ratio is calculated by dividing a company's total liabilities by its shareholder equity. The lower the debt-to-equity ratio, the better is the company’s health, since funding by shareholders and other investors is often seen as better than funding by banks and other creditors	Solvency Ratio	Since the Total Liabilities to equity Ratio of Thomas is lower than Edison. Thomas is more solvent than edison
Profit Margin	14.67%	18.27%	Profit margin is one of the commonly used profitability ratios to gauge the degree to which a company or a business activity makes money	Solvency Ratio	Since the Profit Margin of Edison is higher than Thomas. Edison is more solvent than Thomas
Return on assets	16.60%	25.00%	The profitability ratio is measued in terms of relationship between net profit and assets employed to earn that profit.	Solvency Ratio	Since the Return on assets of Edison is higher than Thomas. Edison is more solvent than Thomas
Return on equity	29.65%	51.80%	Return on equity measures the profitability of equity fund invested in the firm.	Solvency Ratio	Since the Return on equity of Edison is higher than Thomas. Edison is more solvent than Thomas

Conclusion: Edison is most liquid and most solvent.