Answer to Question #187832 in Accounting for DIPALI PATEL

Question

Ques. The following information is given with respect to the ratio's of two companies:

Current Ratio: 

Aman Ltd- 2:01

Roger Ltd - 1.60:1

Quick Ratio:

Aman Ltd- 1.35:1

Roger Ltd - 1:01

Return on investment:

Aman Ltd- 15%

Roger Ltd - 13%

Debt Equity Ratio:

Aman Ltd- 2.5:1

Roger Ltd - 1:01

1) Define the concepts of Current and Quick ratio’s and also, reflect on your understanding 

towards the financial performance of the companies by looking to the above information .

2) Define the terms- Return on Investment and Debt equity ratio and also, reflect on 

your understanding towards the financial performance of the companies.​

Answer 1

1)The current (total) liquidity ratio (current ratio) is a measure of the solvency of the organization, the ability to repay the current (up to a year) obligations of the organization.A coefficient value of 2 or more is considered normal, and often optimal. However, in the world practice, it is allowed to reduce this indicator for some industries to 1.5.

The quick liquidity ratio describes the ability of an organization to repay its short-term liabilities by selling liquid assets.The norm is a value of 1.0 or higher.

The coefficients of both companies are normal, which indicates a good supply of liquid assets for the repayment of obligations.

2)ROI is an indicator of the return on investment or it is also called the return on investment ratio.

Debt Equity Ratio is the ratio of the company's debt to equity. Sometimes it is called the financial leverage ratio. This multiplier shows the financial stability and independence of the company.

According to the first indicator, if we consider that the return on investment in Warren Buffett's Berkshire Hattaway shares for the entire existence is about 19% per year ( the portfolio contains a share of conditional Amazon and its ROI for the time of ownership is 20% per annum, this is considered a good investment in terms of the return on investment ratio. Therefore, the return on investment is normal.

According to the second indicator, we can say that the first company applies a more aggressive financial policy, i.e. attracts more borrowed funds. However, large production and stable companies have a coefficient from 2 to 5. Therefore, based on this information, the second indicator is normal and the companies are financially stable.