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Homework answers / question archive / The selected ratios of the two companies are given below

The selected ratios of the two companies are given below

Finance

The selected ratios of the two companies are given below. Compare the performance of two companies from the standpoint of capital market investors. Schweppes Microsoft Softdrink Ind. avg. Current Ratio 1.99 2.39 1.75 Total Debt Ratio 0.80 0.21 0.96 Times Interest Earned 5.50 72.80 7.17 Total Asset Turnover 1.16 0.80 1.59 P/E ratio 4.78 61.17 4.46

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The interpretation of the Ratios are given below in the table from the standpoint view of capital market investors:-

Ratios Schweppes Microsoft Softdrink Industry Average Meaning of Ratio Interpretation of Ratios
Current Ratio 1.99 2.39 1.75 Current Ratio is a liquidity ratio that indicates Whether company is able to repay it's Short term Liabilities. Higher Ratio denotes better ability to reay short term liabilities. Current ratio of Microsoft is greater than Schweppes, Which Microsoft is in better position to repay it's short term obligations from Current Assets than Schweppes. This implies for Capital Market Investor, if both company goes into liquidation then investors of Microsoft will have high probability of getting their money back.
Total Debt Ratio 0.80 0.21 0.96 It is the ratio that indicates percentage of the total assets that are finaned by debt. Below 0.4 are considered good. In case of Microsoft, 21% of total assets are financed by Debt whereas in case of Schweppes 80% of the total assets are financed by Debt which is very high. Increasing Total Debt Ratio means increase in debt, hence increase in fixed interest obligation. Hence, if company goes into liquidation capital Market Investor of Microsoft will have high chances of repayment because their fixed interest liability is very low.
Times Interest Earned 5.50 72.80 7.17 Times interest earned is a ratio that denotes company's ability to repay interest expenses through it's current Income In case of Microsoft, income is 72.80 times the interest, which means Microsoft can pay interest 72 times from current income. However, Schweppes can only pay 5.50 times. It means Microsoft has huge income to repay it's fixed income obligations. Hence, Capital market Investors will be in relief that company has more than sufficient money to repay it's fixed income obligations.
Total Asset Turnover Ratio 1.16 0.80 1.59 Asset Turnover Ratio is a ratio of company's Revenue over it's total Aseets. This is an indicator shows that how efficiently a company is deploying it's assets to generate it's Revenue. Higher Ratio means company is deploying its assets in effective manner. In Case of Retail Sector ideal Asset Turnover Ratio is 2.5.

In this case Schweppes is able to deploy it's assets more effictively to generate Sales, whereas Microsoft is not able to deploy it's assets in effective way. Hence, Sales capacity of Microsoft will be Underutilized. Hence, there will be low revenue in case of Microsoft relative to Schweppes. Hence, Investors will may not get that much capital appreciation benefit on the shares as Microsoft is not able to generate Revenue to it's Full capacity there will be wastage of Resources.
P/E Ratio 4.78 61.17 4.46 P/E Ratio or Price to Earning Ratio is a key metric that gives value of Market Price of share relatively to it's Earnings Per Share. Higher P/E than Industry denotes Share is overvalued and Vice-versa. Price to Earning Ratio of Microsoft is relatively high as compared to Schweppes. It means Microsoft is overvalued and valuation of Schweppes is fair enough as Industry average of Softdrinks is similar to that of Schweppes. Hence, Investors of Microsoft Should be cautious enough because there might be fall in Share Price due to Overvaluation of Share Price.

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