Frank Collins observes the following data for two companies:
|
Company A |
Company B |
Revenue |
$4,500 |
$6,000 |
Net income |
$50 |
$1,000 |
Current assets |
$40,000 |
$60,000 |
Total assets |
$100,000 |
$700,000 |
Current liabilities |
$10,000 |
$50,000 |
Total debt |
$60,000 |
$150,000 |
Shareholders ‘equity |
$30,000 |
$500,000 |
Which of the following choices best describes reasonable conclusions that Collins might make about the two companies’ ability to pay their current and long – term obligations?
a. Company A’s current ratio of 4.0x indicates it is more liquid than Company B, whose current ratio is only 1.2x, but Company B is more solvent, as indicated by its lower debt – to – equity ratio.
b. Company A’s current ratio of 25 percent indicates it is less liquid than Company B, whose current ratio is 83 percent, and Company A is also less solvent, as indicated by a debt – to – equity ratio of 200 percent compared with Company B’s debt – to – equity ratio of only 30 percent.
c. Company A’s current ratio of 4.0x indicates it is more liquid than Company B, whose current ratio is only 1.2x, and Company A is also more solvent, as indicated by a debt – to – equity ratio of 200 percent compared with Company B’s debt – to – equity ratio of only 30 percent.
The data below appear in the five – year summary of a major international company. A business combination with another major manufacturer took place in 2003. The term turnover in this financial data is a synonym for revenue.
|
2000 |
2001 |
2002 |
2003 |
2004 |
Financial statements |
GBP m |
GBP m |
GBP m |
GBP m |
GBP m |
Income statements |
|
|
|
|
|
Turnover (i.e., revenue) |
4,390 |
3,624 |
3,717 |
8,167 |
11,366 |
Profit before interest and taxation |
|
|
|
|
|
(EB1T) |
844 |
700 |
704 |
933 |
1,579 |
Net interest payable |
-80 |
-54 |
-98 |
-163 |
-188 |
Taxation |
186 |
195 |
208 |
349 |
-579 |
Minorities |
-94 |
-99 |
-105 |
-125 |
-167 |
Profit for the year |
484 |
352 |
293 |
296 |
645 |
|
2000 |
2001 |
2002 |
2003 |
2004 |
Balance sheets |
|
|
|
|
|
Fixed assets |
3,510 |
3,667 |
4,758 |
10,431 |
11,483 |
Current asset investments, cash at bank and in hand |
316 |
218 |
290 |
561 |
682 |
Other current. Assets |
558 |
514 |
643 |
1,258 |
1,634 |
Total Assets |
4,384 |
4,399 |
5,691 |
12,250 |
13,799 |
Interest bearing debt (long term) |
-602 |
-1,053 |
-1,535 |
-3,523 |
– 3,707 |
Other creditors and provisions (current) |
-1,223 |
-1054 |
-1,102 |
-2,377 |
-3,108 |
Tota1 liabilities |
-1,825 |
– 2,107 |
-2,637 |
-5,900 |
-6,815 |
Net assets |
2,559 |
2,292 |
3,054 |
6,350 |
6,984 |
Shareholders” funds |
2,161 |
2,006 |
2,309 |
5,572 |
6,165 |
Equity minority interests |
398 |
286 |
745 |
778 |
819 |
Capital employed |
2,559 |
2,292 |
3,054 |
6,350 |
6,984 |
Cash flow |
|
|
|
|
|
Working capital movements |
-53 |
5 |
71 |
85 |
107 |
Net cash inA0y, from operating activities |
864 |
859 |
975 |
1,568 |
2,292 |