COMPARING FINANCIAL RATIOS Presented below are selected ratios for four firms: Firm A is a heavy equipment manufacturer, 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 Profitability ratios 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 Required:

. Which firm has the weakest current ratio?

. Explain why the turnover ratios vary so much among the four firms.

. Explain why the return on equity ratio is larger than the return on asset ratio for all four firms.

. Discuss whether the large differences in the return on equity ratios can exist over long periods of time.