Question

At the end of 2009, the following information is available for Clobes Company, Snyder Company, and Welz Company (you must show your calculations to receive full credit): Required: Which company has the highest level of financial risk? Using an appropriate ratio, support your answer. Which company is the most profitable from the owners' perspective? Using an appropriate ratio, support your answer. (3) Which company is getting the greatest return on assets? Show calculations.

Answer 1

Answer:

Answer is explained in the explanation section below.

Explanation:

Note: This question is incomplete and lacks necessary data to solve for this question. However I have found similar question on the internet and I will be using that data. Besides, I have attached the data used in the attachment below.

Solution:

1. The debt-to-equity ratio is the best way to assess financial risk. A higher debt-to-equity ratio indicates a higher level of financial risk. This ratio represents the willingness of the equity of the owners to fulfil their obligations.

Formula used:

Debt-to-equity ratio  =  Total liabilities divided by owner's equity

For Clobes:

Total liabilities = 100,000

Owners' equity =  200,000

Debt-to-equity ratio = 100000/200000 = 0.5

For Snyder:

Total liabilities = 300,000

Owners' equity = 200,000

Debt-to-equity ratio = 300000/200000 = 1.5  

For Welz:

Total liabilities = 300,000

Owners' equity = 100,000

Debt-to-equity ratio = 300000/100000 = 3

Welz faces the greatest financial risk because it has the highest debt-to-equity ratio. It has a debt-to-equity ratio of three. Even though it depends on the industry, a company's debt-to-equity ratio should be between 1 and 1.5 if it is considered optimal. In this case, Welz's financial risk is considerably higher.

2. calculate Return on Equity(ROE)

Formula used:

ROE = Net income / Owner's equity

For Clobes:  

Net income = 25,000

Owners' equity = 200,000

ROE = 25,000 / 200000 = 0.125

For Snyder:

Net income = 30,000

Owners' equity = 200,000

ROE = 30000 / 200000 = 0.15

For Welz:  

Net income = 20,000

Owners' equity = 200,000

ROE = 20000 / 100000 = 0.2

Welz has the highest return of equity (ROE) of 0.2.

As a result, Welz is the most profitable company.

3. Return on assets:

Formula used

Return on Assets = Net income / Total assets

For Clobes:  

Net income = 25,000

Total assets = 300,000

Return on Assets  = 25,000  / 300000 = 0.08

For Snyder:  

Net income = 30,000

Total assets = 500000

Return on Assets  = 30000 / 500000 = 0.06

For Welz:  

Net income = 20,000

Total assets = 400,000

Return on Assets  = 20000 / 400000 = 0.05

Hence,

Clobes has the highest return on assets, which is 0.08.