Corporate Finance

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Part 1: Fianacial Ratios

After having the financial information about Deep water experts company, we have generated the financial ratios for the company for the years 2010, 2011 respectively as below and has the following comments: Liquidity:

There is more than one ratio that measures the liquidity for a company which is included in the following table: Ratio Type| 2011| 2010|
Liquidity|
Current Ratio| 3.29| 2.67|
Quick Ratio| 2.2| 1.798|
Cash Ratio| 1.56| 1.08|

1. Current ratio: indicates a company's ability to meet short-term debt obligations.

For 2011= 3.29 and for 2010= 2.67.
From creditor's view a high current ratio is better than a low current ratio and as we can see it increased in 2011. From investors' view current ratio is too high (much more than 2), which indicates that the company may not be using its current assets or its short-term financing facilities efficiently. This may also indicate problems in working capital management. 2. Quick ratio: is a measure of a company's ability to meet its short-term obligations using its most liquid assets. For 2011= 2.2 and for 2010= 1.798.

We can notice that it increased, which means a better position of the company for both creditors and investors. 3. Cash ratio: a refinement of quick ratio and indicates the extent to which readily available funds can pay off current liabilities. For 2011= 1.56 and for 2010= 1.08.

The ratio increased significantly and it is so high which means that the company is holding too much cash and not investing it, which means it is losing a profit that can be gained from investing it. Leverage :

Leverage 2011 2010| Total Debt Ratio| 0.5| 0.417|
Debt Equity Ratio| 1| 0.716|
Equity Multiplier| 2| 1.716|
Time Interest Earned| 3.295| 4.61|
Cash Coverage Ratio| 5.52| 7.53|
There is more than one ratio that measures the leverage for a company. 1. Debit equity ratio: gives an idea about the debt one company is in and the equity it has at its disposal. For 2010 = 0.716 and for 2011=1.0. We can see that the risk increased in 2011 2. Cash coverage ratio: that determines the interest payment ability of the company against the debt it owes that determines the interest payment ability of the company against the debt it owes. For 2011= 5.52 and for 2010=7.53

We can see that the factor decreased in 2011 which means the higher the company's debt burden and the greater the possibility of bankruptcy or default, and less earnings are available to meet interest payments, and that the business is more vulnerable to increases in interest rates. 3. Total Debt ratio: it shows how much the company relies on debt to finance assets. The debt ratio gives a quick measure of the amount of debt that the company has on its balance sheets compared to its assets. For 2011= 0.5 and for 2010= 0.417.

We can see that the ratio increased, which means the greater the risk associated with the firm's operation. 4. Equity Multiplier ratio: it evaluates the company’s ability to use its debt for financing its assets. For 2011= 2.0 and for 2010= 1.716.

This indicates that the company relies more on debt to finance its assets in 2011 than 2010. 5. Time interest earned ratio: it measures the long term viability of a business to pay off its debts For 2011= 3.295 and for 2010= 4.61. We can see that the company had greater ability of a business to repay its interest and debt in 2010 than 2011. Asset Management :

Asset Management 2011 2010| Total Asset Turnover| 1.086| 1.16|
Inventory turnover| 9.3| 12.89|
Days In Inventory| 39 Days| 42 Days|
Receivables turnover| 23.35| 23.37|
Days in Receivable| 16 Days| 16 Days|
Account Payable Turnover| 16| 18 |
Days on Account Payable | 23 days| 20|...
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