Question

PI8-10B The following ratios are available for Rogers Communications Inc. and Shaw Communications for a recent year: Liquidity Rogers Shaw Current ratio Acid-test ratio Receivables turnover 0.48:1 0.95:1 0.36:1 8.3 times 0.81:1 10.7 times Solvency Debt to total assets 79.3% 63.7% Interest coverage 3.3 times 5.5 times nid Profit margin uho Profitability Salto 10.4% 16.9% Asset turnover 0.5 times 0.4 times Return on assets 5.4% 6.8% Return on equity 26.4% 19.0% Instructions (a) Which company is more liquid? Explain. (b) Which company is more solvent? Explain. (c) Which company is more profitable? Explain.

Answer 1

(a) Shaw Communications is more liquid than Rogers Communication as the current ratio of 0.95:1 and acid test ratio of .81:1 are better than that of Rogers Communication which are 0.48:1 and 0.36:1. The acid test ratio represents how much cash an organization has readily available with them to meet their liabilities. In the current case, it can be concluded that Shaw has $ 0.81 for every $ 1 payable as cash readily available where as Rogers only has $ 0.36 cash for every $ 1 of liability.

(b) Shaw Communications is more solvent than Rogers Communication as it has a lower Debt to total assets ratio of 63.7% to that of 79.3% of Rogers which indicates that Shaw has more assets to repay the debt than Rogers. further, the Higher interest coverage ratio of Shaw represents that for paying every 1$ of interest, it has $5.5 of profit, where as Roger has $ 3.3 for every 1$ of profit which also represents that Shaw is in a better position to meet the interest obligations as well.

(c) From the perspective of an equity investor, Rogers Communications is more profitable than Shaw Communications as it has more of its assets financed through debt as compared to Shaw Communication due to which Rogers' Return on equity is 26.4% as compared to 19% of Shaw Communication.

However, From the perspective of how well the business operations are being run, Shaw Communication is better than Rogers Communication, since it has higher profit margins of 16.9% as compared to 10.4% of Shaw Communication.

Further, if the profits margins are viewed for Company as a whole considering all the stakeholders (i.e. debt and equity), Shaw Communication has better return of 6.8% on the total assets as compared to rogers which has return of 5.4%.