Selected information for two companies competing in the catering industry is presented below. Required (a) Analyse and
Question:
Selected information for two companies competing in the catering industry is presented below.
Required
(a) Analyse and compare the liquidity, solvency and profitability ratios of the entities.
(b) From your calculations in part (a), explain which entity is in a more favourable position.
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a Liquidity ratios Solvency ratios Profitability ratios Total assets is used instead of average figure as average assets cannot be calculated b The current ratio calculation shows that both Fine Foodss and Devines current ratio exceed the arbitrary benchmark of 15 times Fine Foodss current ratio indicates that it has 189 of current assets available to cover for every 1 of current liabilities Devines current ratio indicates that it has 714 of current assets for every 1 of current liabilities Based on this it seems that both companies do not have liquidity concerns as their current assets can fully cover their current liabilities However Devine has a rather high current ratio of 714 times considering that the arbitrary benchmark is usually 15 times This might be due to excessive cash receivables or high level of inventory which are unprofitable investments Subsequently Devine needs to reduce idle current assets and use them in more profitable ways such as product improvement or business expansion Hence although both companies are in strong liquidity position Fine Foods ...View the full answer
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