Financial Analysis of Reflect Corporation and Tranquility Inc.
Financial Analysis of Reflect Corporation and Tranquility Inc.
Reflect Corporation (R. Corp.) and Tranquility Inc. (T. Inc.) are two companies that applied for a loan from us recently. In order to assess the risk of granting the loans, I analyzed both companies’ financial situations. This paper attempts to analyze the financial ratios of the two companies based on their financial statements, and thus we can determine which company is better able to pay the loan in time so that the risk of our losing money would be minimized. I will evaluate their financial situations through some crucial parameters, as follows:
Liquidity Ratios
Parameters
R. Corp.
T. INC.
Current Ratio
1.62:1
0.86:1
Receivable Turnover
8.82 (times)
115 (times)
Average Collection Period
42 (days)
3 (days)
Inventory Turnover
6.87 (times)
8.26 (times)
Days In Inventory
53 (days)
44 (days)
Liquidity ratios indicate the short-term ability of a company to pay its obligations. As we computed above, the current ratio of R. Corp. is 1.62:1 in 2012. That means for every dollar of current liabilities, R. Corp. has $1.62 of current assets. So, it has enough current assets relative to its currents debt. Comparatively, T. Inc. only has $0.86 of current assets for every dollar of current liabilities, so it is not healthy financially. Specifically, this company would not be able to pay its short-term debt even if all of its current assets have been converted to cash
The numbers of receivable turnover ratios are pretty different between the two companies: one is 8.82 times, the other one is 115 times. To illustrate by a popular variant of receivable turnover ratio, R. Corp collects its receivables in about every 42 days, but T. Inc. collects its receivables in only 3 days. That means T. Inc. could convert sales to cash very quickly, and this is very good for the liquidity of its business.
The Inventory turnover ratios of the two companies are relatively close, 6.87 vs. 8.26. It
Reflect Corporation (R. Corp.) and Tranquility Inc. (T. Inc.) are two companies that applied for a loan from us recently. In order to assess the risk of granting the loans, I analyzed both companies’ financial situations. This paper attempts to analyze the financial ratios of the two companies based on their financial statements, and thus we can determine which company is better able to pay the loan in time so that the risk of our losing money would be minimized. I will evaluate their financial situations through some crucial parameters, as follows:
Liquidity Ratios
Parameters
R. Corp.
T. INC.
Current Ratio
1.62:1
0.86:1
Receivable Turnover
8.82 (times)
115 (times)
Average Collection Period
42 (days)
3 (days)
Inventory Turnover
6.87 (times)
8.26 (times)
Days In Inventory
53 (days)
44 (days)
Liquidity ratios indicate the short-term ability of a company to pay its obligations. As we computed above, the current ratio of R. Corp. is 1.62:1 in 2012. That means for every dollar of current liabilities, R. Corp. has $1.62 of current assets. So, it has enough current assets relative to its currents debt. Comparatively, T. Inc. only has $0.86 of current assets for every dollar of current liabilities, so it is not healthy financially. Specifically, this company would not be able to pay its short-term debt even if all of its current assets have been converted to cash
The numbers of receivable turnover ratios are pretty different between the two companies: one is 8.82 times, the other one is 115 times. To illustrate by a popular variant of receivable turnover ratio, R. Corp collects its receivables in about every 42 days, but T. Inc. collects its receivables in only 3 days. That means T. Inc. could convert sales to cash very quickly, and this is very good for the liquidity of its business.
The Inventory turnover ratios of the two companies are relatively close, 6.87 vs. 8.26. It