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The following selected liquidity and solvency ratios are available for two companies operating in the petroleum industry:

Question:

The following selected liquidity and solvency ratios are available for two companies operating in the petroleum industry:

Instructions
Assume that you are the credit manager of the local bank. Answer the following questions, using relevant ratios to justify your answer.
(a) Both Petro-Zoom and Sun-Oil have applied for a short-term loan from your bank. Which of the two companies is more liquid and should get more consideration for a short-term loan? Explain.
(b) Both Petro-Zoom and Sun-Oil have applied for a long-term loan from your bank. Are you concerned about the solvency of either company? Explain why or why not.

Solvency
Solvency means the ability of a business to fulfill its non-current financial liabilities. Often you have heard that the company X went insolvent, this means that the company X is no longer able to settle its noncurrent financial...
Transcribed Image Text:

Sun-Oil 1.2:1 13 times 10 times 3996 24 times Petro-Zoom In Current ratio Recetvables turnover Inventory turnover Debt to total assets Times interest earned 1.3:1 12 times 16 times 41% 21 times 1.4:1 13 times 19 times 34% 26 times

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a When reviewing the liquidity ratios for the two companies it would appear that SunOil is less liquid than PetroZoom SunOil has a lower current ratio ...View the full answer


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Inventory turnover is a key metric that helps businesses evaluate the efficiency of their operations. A high turnover ratio is generally considered positive, indicating that the company is effectively selling its inventory and making efficient use of its resources. On the other hand, a low turnover ratio may indicate issues such as overstocking or slow sales and may require further examination to identify and address the underlying causes. Businesses use this ratio to make decisions about inventory levels, production schedules, and pricing strategies. It also helps businesses to identify areas where they may need to make improvements, such as reducing lead times for production or optimizing sales and marketing efforts. Additionally, inventory turnover is used by investors and analysts as a key performance indicator to evaluate the financial health and growth potential of a company.

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