3. The following information is given with respect to the ratio's of two companies Aman Ltd Roger Ltd
Current ratio 2:01 1.60:1 Quick Ratio 1.35:1 1:01 Return on investment 15% 13% Debt Equity Ratio 2.5:1 1:01
a. 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 (2marks for defining and 3 marks for interpretation and reasoning) (5 Marks
b. Define the terms- Return on Investment and Debt equity ratio and also, reflect on your understanding towards the financial performance of the companies (2marks for defining and 3 marks for interpretation and reasoning) (5 Marks
a) Current Ratio and Quick Ratio are liquidity ratios
Current Ratio = Current Asset / Current Liability
Standard Current Ratio = 2
Quick Ratio = Quick Asset / Current Liability
Standard Quick Ratio = 1
Aman Ltd is Better than Roger Ltd since both Current and Quick Ratios are higher than Roger Ltd.
b)Return on Investment = Net Income / Investment
Aman Ltd is Better than Roger Ltd since R.O.I is greater than Roger Ltd
Debt to Equity Ratio = Total Debt / Equity
A Lower Debt to Equity Ratio Means Risk is also Lower. Roger Ltd is using lower debt compared to equity thus Roger Ltd has less risk than Aman Ltd.