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Accounting Final

Essay by   •  July 23, 2012  •  488 Words (2 Pages)  •  758 Views

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You all get the chance to play the role of financial analyst below. The Summary should be a comparison of each company's performance for each major category of ratios (Liquidity, Solvency, and Profitability) listed below. Focus on major differences as you compare each company's performance. A nice way to conclude is to state which company you feel is the better investment and why.

"Liquidity: Liquidity ratios indicate a company's short term ability to meet their ongoing liabilities. For comparison purposes, Oracle seems to be more liquid than Microsoft when considering the inventory turnover ratio and days in inventory. Third party "commercial off the shelf" (COTS) software vendors, such as Microsoft and Oracle, inventory management is critical to their business because the software products they produce have a very short shelf life, and can become obsolete with no value over a period of weeks, not months.

Other liquidity ratios and metrics significant for companies include receivables turnover Ratio, current ratio, average collection period and the current cash debt coverage ratio. These ratios indicate both Microsoft and Oracle can meet their liabilities or obligations in the short term without difficulty.

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"Solvency: Solvency ratios and metrics indicate a company's ability to meet its long-term liabilities including interest expenses, and to accomplish their future expansion and growth plans.

Both Microsoft and Oracle are very solvent in regards to ability to pay their long term obligations and solidify future growth plans. Microsoft is more solvent from a free cash flow and times interest earned ratio perspective. Oracle provided better results than Microsoft for the cash debt coverage ratio. Both companies have similar results for the debt to total assets ratio.

All solvency ratios considered, Microsoft is better positioned to repay long term debt and continue financing it's

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