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This activity helps students recognize the significant role accounting plays in providing financial information to management for decision making through the evaluation of financial statements. This experiential assignment requires students to use ratios to evaluate and analyze a company’s liquidity, solvency, and profitability. Two-Rivers Inc. (TRI) manufactures a variety of consumer products. The company's founders have run the company for thirty years and are now interested in retiring. Consequently, they are seeking a purchaser, and a group of investors is looking into the acquisition of TRI.

To evaluate its financial stability, TRI was requested to provide its latest financial statements and selected financial ratios. Summary information provided by TRI is presented below. Year 1 Year 0 Industry Average Current Ratio 1.61 1.60 1.63 Quick Ratio 0.64 0.65 0.68 Times Interest Earned 8.55 8.60 8.45 Debt to Equity 0.86 0.75 1.03 Inventory Turnover 3.21 3.17 3.18

Paper For Above instruction

The purpose of this analysis is to evaluate Two-Rivers Inc. (TRI) through a detailed examination of key financial ratios to assess its liquidity, solvency, and profitability, which are critical indicators of the company's financial stability and operational efficiency. By interpreting these ratios in the context of TRI’s financial statements, potential investors and stakeholders can make informed decisions regarding the company's viability and investment potential.

Introduction

Financial ratios are essential tools for analyzing a company's financial health. They provide insight into a company's ability to meet short-term obligations, manage debt, generate profits, and operate efficiently. For TRI, understanding the implications of these ratios helps evaluate its current standing and future prospects as it approaches sale or investment.

Liquidity Ratios

The current ratio measures TRI’s capacity to pay short-term liabilities with its short-term assets. In Year 1, TRI’s current ratio is 1.61, slightly above the industry average of 1.63, indicating that TRI holds $1.61 in current assets for every dollar of current liabilities. This suggests a stable liquidity position; TRI has enough assets to cover its short-term debts with a small cushion. The quick ratio, which excludes inventory and other less liquid assets, is 0.64 in Year 1, just below the industry average of 0.68. This indicates that without selling inventory, TRI’s liquid assets can cover approximately 64% of its current liabilities, indicating a slight vulnerability if urgent cash payment is required.

Solvency Ratios

The times interest earned (TIE) ratio assesses TRI’s ability to meet interest expenses from operating income. With a TIE of 8.55 in Year 1, slightly below the industry average of 8.45, TRI demonstrates strong coverage of interest costs, indicating low financial risk in terms of debt servicing. The debt-to-equity ratio of 0.86 shows TRI is financed with relatively low leverage compared to the industry average of 1.03. This suggests TRI relies less on debt, which can be a sign of financial stability and lower risk for creditors.

Profitability and Operating Efficiency

The inventory turnover ratio of 3.21 in Year 1 is slightly above the industry average of 3.18, signifying efficient inventory management and quick conversion of inventory into sales. Higher turnover indicates operational efficiency, reducing storage and holding costs. These ratios collectively suggest that TRI maintains a stable liquidity position, manageable debt levels, and efficient operations, all favorable indicators for potential investors.

Conclusion

Overall, TRI exhibits solid financial stability with ratios close to or slightly better than industry averages. Its liquidity measures are adequate, and its debt levels are manageable, supporting its capacity to meet short-term and long-term obligations. The efficiency in inventory management further enhances its appeal. For stakeholders, these financial indicators portray TRI as a stable and operationally efficient company, likely a prudent investment or acquisition target.

References

• Brigham, E. F., & Houston, J. F. (2019). Fundamentals of financial management (15th ed.). Cengage Learning.
• Higgins, R. C. (2018). Analysis for financial management (11th ed.). McGraw-Hill Education.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2020). Financial statement analysis (12th ed.). McGraw-Hill Education.
• Gibson, C. H. (2019). Financial reporting and analysis (14th ed.). Cengage Learning.
• Penman, S. H. (2018). Financial statement analysis and security valuation (6th ed.). McGraw-Hill Education.