Answer to Question #190675 in Financial Math for Nachiket Pawar

Question

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.

b. 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

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's Ltd.

2) Return on Investment = Net Income / Investment

Aman Ltd is better than Roger Ltd since ROI is greater than Roger's Ltd

Debt to Equity Ratio = Total Debt / Equity

A Lower Debt to Equity Ratio means Risk is also Lower. Using lower debt compared to equity makes Roger Ltd have less risk than Aman Ltd.