question archive Write a 1000 word paper answering; Although short term liquidity of Sainsbury is lesser than Morrisons, it could be justified by the fact that the company has more working capital available as compared to Morrisons
Write a 1000 word paper answering;
Although short term liquidity of Sainsbury is lesser than Morrisons, it could be justified by the fact that the company has more working capital available as compared to Morrisons. This proves the liquidity health of the Sainsbury as against Morrisons. The receivable’s turnover rate of the Sainsbury is more than the competitor which is because of the fact that the company is focusing on expanding the customer base. Once the customer relationship is developed, it would be easier for Sainsbury to lock the customers and attract them to purchase more.
It is evident from the inventory turnover rate that both the companies fetch the sales from inventory in a reasonable period of time. This shows that Sainsbury is working as per planning. its sales are increasing but they are not over-stocking as it will disturb their short term liquidity ratio.The debt ratio of both the companies is similar which indicates that this ratio is maintained across the industry. The ratio reveals positive results as 50% of the assets are financed by equity financing.
This reduces the role of external creditors affecting the decisions of Sainsbury. Despite the fact that interest coverage of Morrison’s is much better than Sainsbury, it does not affect the decision to invest in Sainsbury. Despite the lower interest coverage of Sainsbury, its interest expenses are still 6 times lesser than its operating profit which shows that there is no potential threat of credit risk or bankruptcy for the company.