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Computations are given below which furnish some basis of comparison of the two companies:
Plunkett plc Herring Ltd
Composition of current assets
Inventories 62,6% 45,4%
Receivables 24,2% 26,5%
Cash 13,2% 28,1%
100% 100%

Computation of various ratios :

Plunkett plc Herring Ltd

 Current ratio 3,03 3,26

(£ 910.000/£ 300.000) (£ 1.140.000/£ 350.000)

 Acid-test ratio 1,13 1,78

(£ 120.000 + £ 220.000)/£ 300.000 (£320.000+£302.000)/£ 350.000

 AR turnover 4,23 4,97

(£ 930.000/£ 220.000) (£ 1.500.000/£ 302.000)

 Inventory turnover 1,14 1,74

(£ 930.000 x £ 0,70)/£ 570.000 (£ 1.500.000 x £ 0,60)/£
518.000

 Cash to current liabilities 0,40 0,91

(£ 120.000/£ 300.000) (£ 320.000/£ 350.000)

Herring Ltd. appears to be a better short-term credit risk than Plunkett plc. Analysis of various
liquidity ratios demonstrates that Herring Ltd. is stronger financially, all other factors being
equal, in the short-term. Comparative risk could be judged better if additional information were
available relating to such items as net income, purpose of the loan, due date of current and long-
term liabilities, future prospects, etc.
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