Diversified Industries is a large conglomerate that is continually in the market for new acquisitions. The company has grown rapidly over the last ten years through buyouts of medium-size companies. Diversified does not limit itself to companies in any one industry, but looks for firms with a sound financial base and the ability to stand on their own financially. 

The president of Diversified recently told a meeting of the company€™s officers: €˜€˜I want to impress two points on all of you. First, we are not in the business of looking for bargains. Diversified has achieved success in the past by acquiring companies with the ability to be a permanent member of the corporate family. We don€™t want companies that may appear to be a bargain on paper but can€™t survive in the long run. Second, a new member of our family must be able to come in and make it on its own€”the parent is not organized to be a funding agency for struggling subsidiaries.€™€™

Ron Dixon is the vice president of acquisitions for Diversified, a position he has held for five years. He is responsible for making recommendations to the board of directors on potential acquisitions. Because you are one of his assistants, he recently brought you a set of financials for a manufacturer, Heavy Duty Tractors Inc. Dixon believes that Heavy Duty is a €˜€˜can€™t-miss€™€™ opportunity for Diversified and asks you to confirm his hunch by performing basic financial statement analysis on the company. The most recent comparative balance sheets and income statement for the company follow.

                 Heavy Duty Tractors Inc.
Statement of Income and Retained Earnings
    For the Year Ended December 31, 2014
                   (thousands omitted)

Sales revenue ..............................................................................$875,250
Cost of goods sold ........................................................................542,750
Gross profit .................................................................................$332,500
Selling, general, and administrative expenses .........................264,360
Operating income .......................................................................$ 68,140
Interest expense ............................................................................45,000
Net income before taxes and extraordinary items ................$ 23,140
Income tax expense .........................................................................9,250
Income before extraordinary items ..........................................$ 13,890
Extraordinary gain, less taxes of ........................................$6,000 9,000
Net income ...................................................................................$ 22,890
Retained earnings, January 1, 2014 ............................................169,820
                                                                                                           $192,710
Dividends paid on common stock .................................................10,000
Retained earnings, December 31, 2014 ....................................$182,710

Required
1. How liquid is Heavy Duty Tractors? Support your answer with any ratios that you believe are necessary to justify your conclusion. Also indicate any other information that you would want to have in making a final determination on its liquidity.
2. In light of the president€™s comments, should you be concerned about the solvency of Heavy Duty Tractors? Support your answer with the necessary ratios. How does the maturity date of the outstanding debt affect your answer?
3. Has Heavy Duty demonstrated the ability to be a profitable member of the Diversified family? Support your answer with the necessary ratios.
4. What will you tell your boss? Should he recommend to the board of directors that Diversified put in a bid for Heavy Duty Tractors?

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Heavy Duty Tractors Inc. Comparative Statements of Financial Position (thousands omitted) December 31, 2014 December 31, 2013 Assets Current assets: $ 48,500 $ 24,980 Cash Marketable securities 3,750 128,420 135,850 Accounts receivable, net of allowances 84,120 96,780 9,300 Inventories Prepaid items 7,600 $324, 120 $ 55,890 Total current assets $215,180 $ 55,890 Long-term investments Property, plant, and equipment: $ 45,000 $ 45,000 Land Buildings and equipment, less accumulated depreciation of $385,000 in 2014 and $325,000 in 2013 545,000 605,000 Total property, plant, and equipment $590,000 $650,000 $970,010 Total assets $921,070 Liabilities and Stockholders' Equity Current liabilities: $ 80,000 $ 60,000 Short-term notes Accounts payable Salaries and wages payable Income taxes payable 65,350 14,360 2,590 48,760 13,840 3,650 $126,250 Total current liabilities $162,300 Long-term bonds payable, due 2021 Stockholders' equity: Common stock, no par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $275,000 $275,000 $350,000 $350,000 182,710 $532,710 $970,010 169,820 $519,820 $921,070