FIN (discussion 2)

I have chosen the current ratio and the debt equity ratio. the reason I have chosen these ratios is that foe the current ratio it is used to assess the ability of a company to settle its short term obligations using their current assets (Linares-Mustarós, Coenders & Vives-Mestres, 2018). A higher ratio is better. For the debt equity ratio, it is used to measure the ability of the shareholder equity to cover the long term debts of the company. I have chosen two companies in the computer industry which are Dell and HP.

For the last financial year, the current ratio for Dell was 0.8048 while that for HP was 0.7875. Foe the Debt Equity ratio, Dell had a ratio of 6.353 while HP had a ratio of -2.7904. this means that Dell has a better ability to offset its short term debts than HP. For the debt equity ratios, the two companies are risky. For HP its riskier as the ratio is negative meaning it has more liabilities than assets. Investors should look at these ratios as a negative debt equity ratio may be a sign of bankruptcy.

Article Summary

Title: Select Financial Ratios as a Determinant of Profitability Evidence from Petrochemical Industry in Saudi Arabia

The Petrochemical Industry is one of the major economy contributors in the Kingdom of Saudi Arabia. The government has been promoting the diversification in the sector as the oil reserves are reducing. It is also promoting a greater expansion for an increase in the manufacturing of value added products. This is aimed at increasing the profitability of the sector. The sector may experience some warning margins as the demand of their products weakens in the Asian market.

The paper is aimed at examining some financial ratios that have an influence on profitability. These ratios are: Long-Term-Debt to Equity Ratio (LTDER), Creditors’ Velocity (CRSV), Inventory Turnover Ratio (ITR), Total Assets Turnover Ratio (TATR), Debtors’ Turnover Ratio (DTR) and Net Profit Margin (NPM). Only debtors’ turnover ratio had no effect on profitability. The other five ratios had a significant effect on the profitability in the petroleum sector in the Kingdom of Saudi Arabia.