This ratio eliminates the stock figure from that of current assets and like the current ratio; it is used to measure the liquidity of a firm. The quick ratio may in some instances be preferred over the current ratio as it is inherently difficult to turn some assets into cash. In regard to the two companies, the quick ratio brings out Plume Inc. As being more risky as it is more likely to default on its short-term obligations. According to Tracy (2009), the quick ratio of a firm should ideally be grater than 1.
Part B: Health and Risk Analysis in Brief
Looking at the debt to asset ratio, Arrow Company comes across as being more risky than Plume Inc. This is basically because its higher debt to assets ratio exposes it to a larger amount of debt which both investors and creditors may be wary of. Further, the higher debt to equity ratio in the case of Arrow Company could put the company in risky position if the level of debt used becomes too high. Using these two financial leverage ratios, one can conclude that the solvency of Arrow Company is not guaranteed in the long-term. The lower current ratio in the case of Arrow Company also means that it is more risky than Plume Inc. In the eyes of creditors. However, looking at the quick ratio, Plume Inc. whose quick ratio is less than 1 comes across as being less appealing...
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