Ratio Analysis of Bawang and China Child Care

IV. Ratio Analysis

A. Liquidity

1. Current ratio

The current ratio is a financial ratio measures the ability of an organization to pay its bills backed by its current assets. The current ratio of Bawang, which has dropped to the level below 1:1 in 2013 and 2014, is consistently below that of China Child Care during the recent 4 financial years, indicating that Bawang may encounter severe troubles to pay off its current liabilities, even by liquidating all its current assets. For China Child Care, since it had just completed its IPO in 2011, the proceeds from the offering had tremendously increased its current asset, which lead to a huge rise in the current ratio.

2. Quick ratio

The quick ratio is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quick ratio of Bawang has dropped below than 1:1 since 2012, which is also largely below that of China Child Care over the last 4 years. For China Child Care, because of the same reason, the cash proceeds from the IPO has also boosted its quick ratio to a very high level since 2011.

3. Interest coverage

The interest coverage ratio measures the ability of a company to pay the interest on its outstanding debt. Since Bawang has experienced losses over the last 4 years, the interest coverage of Bawang is continuously negative. But for China Child Care, the interest coverage ratio has experienced an enormous increase in 2013. Then the company paid off all its long-term debt in 2014, which lead the interest coverage ratio not available.

4. Accounts payable turnover

Accounts payable turnover is a ratio that measures the speed with which a company pays its suppliers. The accounts payable turnover of Bawang kept at a low level around 2.5, while that of China Child Care continuously dropped over the last 4 years, which indicates that its bargain power with its suppliers has been rising over the period.

5. Liquidity Summary

All the liquidity ratios are used to determine a company’s ability to pay off its short-terms debts obligations. The main users of the liquidity ratios are suppliers as well as creditors, who worry about whether their receivables and lending could be repaid, and management as well as investors who care about the company performance. For the overall position, Bawang is out-performed by China Child Care in all scales.

B. Coverage

1. Common equity leverage

The common equity leverage compares the return available to the shareholders to the returns available to all capital providers. During the last 4 years, the common