You are given the following simplified statements of financial position of two very similar companies, Domer Castle Company and Warmer Castle Company as at 31 December year 1.

During year 1 the operating profit (earnings before interest and taxation) of the Domer Castle Company amounted to £31,000. The operating profit of the Warmer Castle Company amounted to £32,000.

Which of the two companies appears to be financially weakest, and why? You should calculate the current ratio, the liquidity ratio, the capital gearing ratio and the number of times interest is covered by operating profit.

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Domer Castle Ltd Warmer Castle Ltd Non-current assets Tangible assets Freehold premises (at cost) 300,000 100,000 Furniture (at cost less depreciation) 4,000 80,000 Vehicles (at cost less depreciation) 10,000 90,000 44,000 Investments 314,000 314,000 Current assets Inventories Receivables Cash 8,000 9,000 12,000 10,000 14,000 5,000 34,000 34,000 Total assets 348,000 348,000 Current liabilities Trade payables 17,000 17,000 Non-current liabilities 10% debentures 100,000 200,000 Total liabilities 117,000 217,000 Equity Share capital 100,000 100,000 Retained earnings 131,000 31,000 231,000 131,000 Total liabilities and equity 348,000 348,000