Comprehensive problem shiit

Comprehensive problem shiit - debt coverage and the...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Michael Reber Comprehensive problem analysis Accounting 230 4/29/11 There are three parts to how well a company operates liquidity, solvency and profitability. I will first go over what each of these mean and then talk about which company, blue or red has the best liquidity, solvency and profitability and why. Liquidity is how well a company is able to pay its short-term debts and obligations. The ratio that helps determine liquidity is the current ratio. The higher the number of the ratio is the better the company’s liquidity. Solvency on the other hand is a company’s ability to pay its long-term debts and obligations. If a company becomes insolvent it can no longer operate and is undergoing bankruptcy. Some of the ratios that determine solvency are debt to total assets ratio, current cash
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: debt coverage and the times-interest-earned ratio. Profitability assesses how well a company is able to generate earnings compared to its expenses during the period. Some examples of profitability ratios are profit margin, return on assets and return on stockholders equity. The blue company had the best profitability, solvency and liquidity. The reason for this was because it had higher turnover ratios, lowest days in inventory, lowest collection period, and more free cash flow. Although the Blue Company had a lower profit margin the ability of the company to turnover inventory and collect payments was much greater....
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online