Technic And Solar-Sun
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Solvency and Liquidity Position
In 2005, both companies saw a slight decline in their current ratio (as seen in appendix A), although the percentage decline is small and not a concern. Both companies can cover current liabilities with current assets if need be, although Technic has an advantage with a current ratio of over 2, of which very little is locked up in cash (a sign of management efficiency). Sonar-Suns ratio is close to 1, causing some concern.
Further solvency analysis continues to show Technics numbers as being strong. Even the quick ratio for the company, a stricter ratio since it only counts liquid assets, is approaching 2.0. An inventory reduction in 2005 helped increase this ratio 17%, an encouraging sign. For Sonar-Sun, however, our suspicions about solvency are validated, as a large amount of inventory has their quick ratio just under .4. This is not ideal as liabilities may not be able to be paid off if inventory can not be converted to cash quickly (i.e. cash from operating activities decreases) in the future. Although Sonar-suns ratios may be caused by management decisions concerning cash allocations (i.e. acquisitions in 2005, as seen on the statement of cash flows), the ratios that result may trouble the minds of potential investors and debtors.
Both companies, however, are in a good position when looking at interest coverage ratios. This is especially good news for Sonar-Sun as interest expenses will be met – even if other liabilities can not be paid off, which may buy them time to find alternative financing options.
As seen in Appendix A, both companies have what may be suspect accounts payable ratios that are greater than the industry average of 72 days (over a 10 year period from 1991 to 2001). Interpretation of this ratio is not always straight-forward, however, as this could signify an inability to pay suppliers in a timely