Before investing in a company, it is necessary to check whether it can sustain its liquidity by remaining solvent. This is particularly the case when choosing between two companies and coming up with the most viable company to invest in. Liquidity ratios are instrumental in determining which company between Griffin Care Services Ltd. And Midland Commercial Ltd is in a position to pay off its short term debts for Jupiter Holding Plc. The Board of directors to make an appropriate decision on which of the two ventures to invest in. Usually, a company with a current ratio of 1 or more is interrupted to mean that its existing assets are equal to or exceed its current debt obligations. Thus it is in a better position to meet its short term obligations. For the particular period given, Griffin Care Services Ltd has a current ratio of 2 while Midland Commercial Ltd has a current ratio of 7.95. It is an indicator that it will be appropriate for Jupiter Holding Plc. The Board of directors invests in Midland Commercial Ltd, which has greater liquidity than Griffin Care Services Ltd. This means Midland Commercial Ltd can sustain its market operations much longer, which translates to a sound investment decision.
Profitability ratios are financial considerations applied by investors and analysts in evaluating and measuring a company’s ability to convert its assets into cash. Companies with higher liquidity ratios are considered appropriate for investment as it means that the business generates enough cash flow, revenue and profit. In analyzing Griffin Care Services Ltd and Midland Commercial Ltd, the profitability ratios are ROCE, return on assets, asset turnover, gross profit margin, and net profit margin. Regarding ROCE, Griffin care services seem to be more profitable, with a 95% score against Midland Commercial Ltd, which has a 43.17% ROCE. At the same time, Griffin Care Services holds a return on Assets of 95%, Midland Commercial Ltd 43.17. As a result, Griffin Care Services seems to be performing better than Midland Commercial Ltd concerning returning on assets. Griffin Care services have a turnover ratio of 3.7 times, while Midland Commercial is 1.17.This is an indication that Griffin Care Services is more profitable as compared to Midland commercial services. Finally, the Net Profit Margin, which is the bottom line, generally works as an indicator of the company’s profitability. While Griffin Care Services holds a net profit margin of 26%, Midland Commercial holds a net profit margin of 36.80%. Though Griffin Care services perform better in various profitability ratios, investing in Midland Commercial, which has a higher net profit margin, would be the most appropriate decision for Jupiter Holding Plc. The Board of directors as this ratio is the bottom line determining a company’s profitability.
A gearing ratio is an analysis applied by investors and financial analysts in determining a company’s financial leverage. The gearing ratio of Griffin Care services stands at 0%, while that of Midland Commercial is 3.59%. This indicates that Griffin Care Services is not using its profit to service its loans. On the other hand, Midland Commercial’s gearing ratio is 3.59% which can be considered low according to industry standards. The interest cover ratio for these companies is also analyzed to determine the financial risks they are exposed to. Griffin Care Services has an interest cover ratio of 0%, and Midland Commercial has an interest cover ratio of 12.03%. Investors often consider a higher interest cover ratio appropriate for a company as it indicates that the company can pay its expenses conveniently in the future. Thus in terms of gearing ratios, Midland investment remains more appropriate for acquisition by Jupiter Holding Plc. Board of directors.
Efficiency ratios are considerations applied by investors and analysts in determining a company’s ability to use available resources such as assets and capital to gain revenue. High-efficiency ratios serve as an indicator that a company is more profitable. The receivable collection period for Griffin Care services is 19, while Midland Commercials is 100. This indicates that Midlands’s commercials can sustain its operations much longer without relying on receivables. The cash cycle for Griffin Care Services is -78 while Midland Commercials is four, indicating that Midland commercial has a more favourable efficient ratio. Lastly, Griffin Care Services stands at 97 days, while Midland commercials are 96 days. Generally, however, I would recommend that Jupiter Holding Plc. consider investing in Midland Commercials regarding its efficiency ratios.
In conclusion, the profitability, gearing, efficiency and liquidity ratios analysis indicate that Midland Commercials is worth investing in. As a result, I would recommend that Jupiter Holding Plc. invest in Midland commercials rather than Griffin Care Services due to the reasons mentioned above.
Q 1.2 Working Capital Management Ratio(WCM)
Working capital management means managing current assets and liabilities to ensure that a business operates smoothly. The working capital ratio is instrumental to investors and analysts as it helps them determine a company’s ability to go bankrupt. A business whose current assets exceed its current liabilities is more suitable for investment as it is considered to be in good financial health. Below is an analysis of both Griffin Care Services and Midland Commercial’s working capital ratio
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