Liquidity and Efciency Ratios

a) Current ratio
The current ratio of Stanmore is 2.14 and that of Neilsons is 1.53. Therefore,
Neilsons is considered to be more proftable as a current ratio of around 1.5
2.! is prett" encoura#in# for a business. $t su##ests that the business has
enou#h cash to be able to pa" its debts and too much fnance is not tied up in
current assets thus could be rein%ested or distributed to shareholders.
Normall", a hi#h ratio indicates &safe& li'uidit", but also it can be a si#nal that
the compan" has problems #ettin# paid on its recei%able or ha%e lon#
in%entor" turno%er, therefore a current ratio of 1.52.! is more preferable.
b) (uic) or *cid test ratio
The 'uic) ration of Stanmore is 1.+1 and that of Neilsons is 1.1+. Normall", a
'uic) ratio hi#her than 1,1 indicates that the business can meet its current
fnancial obli#ations -ith the a%ailable 'uic) funds on hand. .ere, both
companies can be considered but considerin# Stanmore -ould be more
proftable since it has the hi#hest ratio.
c) Cash ratio
The cash ratio of Stanmore is !.!1 and that of Neilsons is !.5/. Normall", a
cash ratio of !.5,1 or hi#her is preferred. .ere, Neilsons is considered to be
more benefcial since it has the hi#hest cash ratio compared to Stanmore.
d) Stoc) turno%er
The stoc) turno%er of Stanmore is 3./0 times and that of Neilsons is 5.4/.
Neilsons is more preferable since its stoc) turno%er is hi#hest, thus meanin#
that it is better for a business to turn o%er its stoc)s 'uic)er and ma)e profts.
e) Stoc) turno%er period
The stoc) turno%er period of Stanmore is 00 da"s and that of Neilsons is /1
da"s. Neilsons ha%e a better preference since its stoc) turno%er period is
lo-er. The lo-er the stoc) turno%er period the better it is for the business.
f) 2ebtors collection period
The debtors collection period for Stanmore is 222 da"s and that of Neilsons is
/5 da"s. Neilsons is preferred since is debtors collection period is lo-er and
there is also prompt pa"ment on part of debtors.
#) Creditors pa"ment period
The creditors pa"ment period for Stanmore is 101 da"s and that of Neilsons is
152 da"s. .ere Stanmore is preferred since it has the hi#her creditors
pa"ment period and companies also -ant to preser%e cash.
h) Cash operatin# c"cle
The cash operatin# c"cle for Stanmore is 124 da"s and that of Neilsons is 2!
da"s. Neilsons has a #reater preference since it has the shorter cash
operatin# c"cle -hich means that a short c"cle allo-s a business to 'uic)l"
ac'uire cash that can be used for additional purchases or debt repa"ment.
The lo-er the cash con%ersion c"cle, the more health" a compan" #enerall"
is. Cash operatin# c"cle can e%en be ne#ati%e3 for instance, if the compan"
has a stron# mar)et position and can dictate purchasin# terms to suppliers
4i.e. can postpone its pa"ments).
Proftability and Operating Ratios
a) 56T*
The 56T* for Stanmore is 32.+57 and that of Neilsons is 1/./17. Stanmore
has a hi#her preference since its 56T* is #reater than that of Neilsons thus
meanin# that hi#her return on assets is, the better, because the compan" is
earnin# more mone" on its assets. * lo- return on assets indicates ine8cient
use of compan"9s assets.
b) 6peratin# proft :ar#in
The operatin# proft mar#in for Stanmore is 20.517 and that of Neilsons is
0.237. Stanmore has a #reater preference since its operatin# mar#in is
hi#her thus meanin# that an increasin# operatin# mar#in increases the
compan";s earnin# more per dollar of sales.
c) *sset utili<ation
The asset utili<ation for Stanmore is 1.117 and that of Neilsons is 1.+17.
Neilsons is much preferred as its asset utili<ation is hi#her thus meanin# that
a hi#h ratio ma" mean more e8cient mana#ement.
d) =ross proft mar#in
The proft mar#in for Stanmore is 5+.2/7 and that of Neilsons is 45.3+7.
Stanmore is more preferable here since a hi#h #ross proft mar#in indicates
that the compan" can ma)e a reasonable proft, as lon# as it )eeps the
o%erhead cost in control. * lo- mar#in indicates that the business is unable
to control its production cost.
e) 6peratin# e>penses as a percenta#e of sales
The operatin# e>penses as a percenta#e of sales for Stanmore is 20.1!7 and
that of Neilsons is 3/.157. Stanmore is preferable since a lo-er operatin#
e>pense ratio indicates a #reater proft for the in%estors. $n simple -ords, the
operatin# e>pense ratio re?ects the percenta#e of a propert";s income -hich
is bein# utili<ed to pa" operational and maintenance e>penses.
*ccordin# to me Stanmore is more proftable since the proftabilit" and operatin#
ratios are much in fa%or of Stanmore since its is more preferable as compared to
Neilsons.