Problem 12-82A COMPARING FINANCIAL RATIOS Presented below are selected ratios for four firms: Firm A is a heavy equipment manufac- turer, Firm B is a newspaper publisher, Firm C is a food manufacturer, and Firm D is a grocery chain. Firm A Firm B Firm C Firm D Short-term liquidity Current ratio 1.3 1.7 1.0 1.6 Debt-management ratio Long-term debt-to-equity 1.81 .45 .30 .09 Asset efficiency ratios Accounts receivable turnover 4.66 8.28 11.92 116.15 Inventory turnover 6.26 40.26 7.29 8.43 Operating income 12.6% 25.4% 21.2% 3.8% Net income 5.9 10.9 10.8 1.9 Return on assets 4.7 10.6 16.8 10.3 Return on equity 36.0 22.6 38.0 21.2 Profitability ratios Required: 1. Which firm has the weakest current ratio? 2. Explain why the turnover ratios vary so much among the four firms. 3. Explain why the return on equity ratio is larger than the return on asset ratio for all four firms. 4. Discuss whether the large differences in the return on equity ratios can exist over long periods of time.
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