Question

LIQUIDITY:

FY 2017          FY 2016

Current Ratio:

Lockheed Martin.        1.38                 1.20

Raytheon                     1.66                 1.54

Quick Ratio:

Lockheed Martin         .91                   .80

            Raytheon                     1.49                 1.35

Comment On The Company’s Liquidity: Comment on what you see. What story do the numbers tell?

Answer 1

The Current Ratio measures a firms ability to pay off its short term obligations. It is calculated as follows:

Current Ratio = Current Assets/Current liabilities

Ideally, current ratio of 2 is desirable. Current ratio for both Lockheed Martin and Raytheon is lesser than 2. Moving from Fy 2016 to Fy 2017, the current ratio for both the companies improves indicating increase in current assets or decrease in current liabilities or both. For Lockheed Martin the current ratio improves from 1.2 to 1.38 and for Raytheon it moves from 1.54 to 1.66. Between the two companies, Raytheon is better placed as it has higher current ratios in both Fy 2016 and Fy 2017.

Quick Ratio measures a firm's ability to meet current liabilities with its most liquid assets. It is calculated as:

Quick Ratio = Current Assets excluding inventories/Current liabilities

A quick ratio above 1 is considered safe as liabilities can be safely paid back using liquid assets. Raytheon's quick ratio in Fy 2016 and Fy 2017 is 1.35 and 1.49. The company is well poised. Its quick ratio is improving year to year. Quick ratio less than 1 indicates that the firm cannot fully pay back its liabilities with its most liquid assets. Lockheed Martin has quick ratio of 0.80 and 0.91 in Fy 2016 and Fy 2017. This is a worrisome situation for Lockheed Martin. Even though the quick ratio is improving, it is still less than 1.

In conclusion Raytheon is in a better position vis-à-vis Lockheed Martin as far as liquidity is concerned.