As loan analyst for Second Bank, you have been presented the following information:

Era Co. McCoy Co.

Assets

Cash $220,000 $150,000

Receivables 108,000 241,000

Inventories 505,000 390,000

Total current assets 833,000 781,000

Other assets 230,000 405,000

Total assets $1,063,000 $1,186,000

Liabilities and Equity Current liabilities $241,000 $401,000

Long-term liabilities 200,000 300,000

Capital stock and retained earnings 622,000 485,000

Total liabilities and equity $1,063,000 $1,186,000

Annual sales $1,300,000 $2,300,000

Rate of gross profit on sales 35% 25%

Each of these companies has requested a loan of $200,000 for 6 months with no collateral offered. Inasmuch as your bank has reached its quota for loans of this type, only one of these requests is to be granted.

Which of the two companies, as judged by the information given above, would you recommend as the better risk and why? Assume that the ending account balances are representative of the entire year.

Era Co. McCoy Co.

Current ratio 3.46 : 1 1.95 : 1

Acid-test ratio 1.36 : 1 0.97 : 1

Accounts receivable turnover 12.04 times 9.54 times

Inventory turnover 1.67 times 4.42 times

Cash to current liabilities 0.91 : 1 0.37 : 1