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Explanation & Answer
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QUESTION 1:
Using the information below: comment on the financial strength/weakness of Company A
and B. Utilize ratios to back up your response.
Question 1
Financial ratios
Company A
Company B
Industry
Current ratio
1.00
2.20
1.71
Acid test ratio
0.57
1.40
1.14
Cash ratio
0.14
0.20
0.25
Debt to equity ratio
4.00
1.22
1.70
Total debt ratio
0.80
0.55
0.63
Financial leverage
5.00
2.22
2.70
Long-term debt to equity ratio
2.25
0.44
0.76
Liquidity ratios
Leverage ratios
Company B has higher liquidity than both Company A and the industry. This means that it should not
have major problems covering its short-term obligations. Even though Company A’s liquidity is not
as high as Company B’s; its current ratio is still 1 (which is not bad). The problem with Company A’s
liquidity is that it is significantly lower than the industry and that is probably a b...
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