Assignment 1 1. Review your accounting toxtbook andlor chapters 3 and 4, based o
ID: 1170787 • Letter: A
Question
Assignment 1 1. Review your accounting toxtbook andlor chapters 3 and 4, based on Price Eamings ratio, PricelBook ratio, time interest earned, total asset turnover, operating proft margin, and 2. Fill in the following information for the six companies chosen. current ratio, or your opinions, choose six companies as your investment portfolio Fim Firm 1 Firm 2 Firm 3 Firm 4 Firm 5 6 Company name Price/Eamings ratio 15.58 Price/Book ratio ime interest eamed 2.21 total asset turnover 0.7353 operating proft margin surtent roto004 10.26 8.40% Note: When your portfolio outperforms others' on first trading day in August, you will earn extra credits from this homework time interust earnedeOperating income/interest expense total asset turnover Sales or total revenue/Total assets 3. Explain the profitablity, solvency, and liquidity of the firms. Please explain the results for each firmExplanation / Answer
Part 1 & 2 cannot be answered in the question as Chapters 3 and 4 referred to in the question from accounting texbook are not available. I will answer Part 3 of the question and it is given as under.
Profitability - Profitability of a firm determines the success of a firm. Basically costs incurred in producing a product or in providing the service when deducted from the revenues earned gives profitability. An income statement of a company can serve as a measure of profitability as it provides information regarding the revenues, expenses and all other parameters which can be used to calculate profitability of a business.Profitability ratios also gives an indication of financial health of a business/firm. They are calculated based on the total sales, assets and networth of a firm.
Solvency - Solvency provides the measure to evaluate the ability to meet the long term funds requirement of a firm. It gives us information ragrding the strength of a firm to meet its long term goals pertaining the funds needs of a firm. It cannot be confused with liquidity. Liquidity refers to the ability to meet the short term fund requirement. For a firm to continue in a business, it is must that it should be solvent enough otherwise this may lead to bankruptcy in the future.
Liquidity - Liquidity refers to the ability of a firm to meet its short term obligations. It determines the strength of a firm to meet its short term debt obligations usually less then a year. COverage of short term debt by short term assets of a company is required to have a appropriate liquidity otherwise this may lead to short term shortage of funds and ultimately hampers the perormance of a firm to run its day to day operations. Limited coverage formshort term liabilities indicates a red flag to investors of a company which may lead to even more shortage of business.This in turn will adversaly affect the long term health of a business as this may leas to selling off inventory and most important assets os a company to m eet its short term requiremnt of funds.