Answer to Question #180392 in Finance for AMIT VIKAS MALKAR

Question

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

Answer 1

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.