an Liquidity Ratios: How Liquid Is the Company? The fourth basic type of financial ratio is the liquidity ratio. These ratios measure a company's ability to meet financial obligations as they become current. The current ratio, defined as current assets divided by current liabilities, assumes that current assets are much more readily and certainly convertible into cash than other assets. It relates these fairly liquid assets to claims that are due within one year-the current liabilities. Current assets Current liabilities 1. SciTronics held $. of current assets at year-end 2008 and owed $ to creditors, due to be paid within one year. SciTronics' current ratio was increase/decrease from the ratio of_at year-end 2005. The quick ratio or acid test is similar to the current ratio but excludes inventory from the current assets: Current assets Inventory Current liabilities Inventory is excluded because it is often difficult to convert into cash (at least at book value) if the company is struck by adversity. 2. The quick ratio for SciTronics at year-end 2008 was an increase/decrease from the ratio of at year-end 2005. Profitability Revisited Management can "improve" its return on equity by improving its return on sales and/or its asset turnover and/or by increasing its financial leverage as measured by total assets divided by owners' equity. Net Income Sales Total Assets ROE Sales Total Assets Owners'Equity Each method of improvement differs operationally and in terms of risk. 1. The improvement in SciTronics' return on equity from 8.2% in 2005 to 18.7% in 2008 resulted from an increase/decrease in its return on sales; and from an increase/decrease in its asset turnover, and an increase/decrease in its financial leverage. I am first providing the answers to your questions. The data that I have used to answer your questions, follow after that Answers to your questions: 1.Soltronics ratio of total assets divided by increased from 1.52 at the year end 2005 to 2.12 at year and 2008 2 ...total liabilities were 53% of its total assets.34% in 2005 3.The total debt ratio at market was 0.32 4. .....operating income) were $ 26,000,000 in 2008 and its interest charges were $ 2.000.000. Its times interest earned was 13 times. This represented an improvement from the 2005 level of 10 times Data used by me: SciTronics Consolidated Balance Sheet December 31, 2005-2008 2005 2006 2007 2008 Cash 9,000 10,000 15,000 18,000 Accounts receivable 42,000 53.000 61,000 65,000 Inventories 21000 28.000 30.000 20,000 Other current assets 10,000 13,000 21,000 20,000 Total current 82.000 104.000 127.000 133,000 Net property & equipment 9.000 12,000 13.000 18,000 Other 2000 2,000 6,000 8.000 Total assets 93,000 118,000 146,000 159.000 Notes payable 3.000 18,000 8.000 10,000 Accounts payable 5.000 6,000 7.000 6.000 Accrued expenses 10,000 13,000 21,000 28,000 Other current liabilities 3.000 3,000 4000 4,000 Total current liabilities 21000 40.000 40.000 48,000 Long-term senior debt 10,000 9,000 8.000 7,000 Subordinated convertible debt 20,000 20,000 Other liabilities 1000 3,000 2.000 9,000 Owners' equity 61,000 66,000 710000 85,000 Treasury stock -10,000 Owners' equity 61,000 66.000 711,000 75.000 Total liabilities and equity 93.000 118.000 146.000 150.000 SciTronics Inc. Consolidated Income Statements 2005-2008 (5 in thousands) 2004 2005 2006 2007 2008 Sales 115,000 147,000 171.000 205,000 244,000 Cost of goods sold 43.000 50.000 63,000 74,000 104,000 121,000 142 000 170,000 Gross margin Research & development 15.000 20.000 26,000 28.000 Selling, general & administrative expenses 79,000 92.000 106.000 116,000 Operating income 10000 9,000 10,000 26.000 Interest expense 1000 2,000 2,000 2.000 Profit before tax 9,000 7,000 8,000 24,000 Income tax 4,000 2.000 3,000 10,000 Net Income 5.000 5.000 5.000 14 000