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Ratio analysis may be a quantitative strategy of picking up knowledge about a company's liquidity, operational proficiency, and productivity by examining its financial statements, such as the balance sheet and income statement.

Computations are given below, which furnish some basis of comparison of the two companies:

Working Notes:

Computation of Current ratio of Toulouse Co.

$\begin{array}{rcl}\mathrm{Current}\mathrm{ratio}& =& \frac{\mathrm{Current}\mathrm{assets}}{\mathrm{Current}\mathrm{liabilities}}\\ & =& \frac{\$910,000}{\$305,000}\\ & =& 2.8:1\end{array}$

Computation of Current ratio of Lautrec Co.

$\begin{array}{rcl}\mathrm{Current}\mathrm{ratio}& =& \frac{\mathrm{Current}\mathrm{assets}}{\mathrm{Current}\mathrm{liabilities}}\\ & =& \frac{\$1,140,000}{\$350,000}\\ & =& 3.26:1\end{array}$

Computation of acid-test ratio of Toulouse Co.

$\begin{array}{rcl}\mathrm{Acid}\mathrm{test}\mathrm{ratio}& =& \frac{\mathrm{Cash}+\mathrm{receivables}}{\mathrm{Current}\mathrm{liabilities}}\\ & =& \frac{\$120,000+\$220,000}{\$305,000}\\ & =& \frac{\$340,000}{\$305,000}\\ & =& 1.11:1\end{array}$

Computation of acid-test ratio of Lautrec Co.

$\begin{array}{rcl}\mathrm{Acid}\mathrm{test}\mathrm{ratio}& =& \frac{\mathrm{Cash}+\mathrm{receivables}}{\mathrm{Current}\mathrm{liabilities}}\\ & =& \frac{\$320,000+\$302,000}{\$305,000}\\ & =& \frac{\$622,000}{\$350,000}\\ & =& 1.78:1\end{array}$

Computation of accounts receivable turnover of Toulouse Co.

$\begin{array}{rcl}\mathrm{Account}\mathrm{receivable}\mathrm{turnover}& =& \frac{\mathrm{Annual}\mathrm{sales}}{\mathrm{Current}\mathrm{liabilities}}\\ & =& \frac{\$930,000}{\$305,000}\\ & =& 4.23\mathrm{times}\end{array}$

Computation of accounts receivable turnover of Lautrec Co.

$\begin{array}{rcl}\mathrm{Account}\mathrm{receivable}\mathrm{turnover}& =& \frac{\mathrm{Annual}\mathrm{sales}}{\mathrm{Current}\mathrm{liabilities}}\\ & =& \frac{\$1,500,000}{\$350,000}\\ & =& 4.97\mathrm{times}\end{array}$

Computation of accounts inventory turnover of Toulouse Co.

$\begin{array}{rcl}\mathrm{Inventory}\mathrm{turnover}& =& \frac{\mathrm{Annual}\mathrm{sales}脳\mathrm{Unit}\mathrm{selling}\mathrm{price}}{\mathrm{Inventories}}\\ & =& \frac{\$930,000脳0.70}{\$570,000}\\ & =& 1.14\mathrm{times}\end{array}$

Computation of accounts inventory turnover of Lautrec Co.

$\begin{array}{rcl}\mathrm{Inventory}\mathrm{turnover}& =& \frac{\mathrm{Annual}\mathrm{sales}脳\mathrm{Unit}\mathrm{selling}\mathrm{price}}{\mathrm{Inventories}}\\ & =& \frac{\$1,500,000脳0.60}{\$518,000}\\ & =& 1.74\mathrm{times}\end{array}$

Computation of cash to current liabilities of Toulouse Co.

$\begin{array}{rcl}\mathrm{Cash}\mathrm{to}\mathrm{current}\mathrm{liabilities}& =& \frac{\mathrm{Cash}}{\mathrm{Current}\mathrm{liabilities}}\\ & =& \frac{\$120,000}{\$305,000}\\ & =& 0.39:1\end{array}$

Computation of cash to current liabilities of Lautrec Co.

$\begin{array}{rcl}\mathrm{Cash}\mathrm{to}\mathrm{current}\mathrm{liabilities}& =& \frac{\mathrm{Cash}}{\mathrm{Current}\mathrm{liabilities}}\\ & =& \frac{\$320,000}{\$350,000}\\ & =& 0.91:1\end{array}$

Investigation of different liquidity ratios illustrates that Lautrec Co. is more grounded financially, all other variables being equal, within the short term. The comparative risk may well be judged superior in the event that extra information was accessible relating to such things as net income, the reason for the loan, the due date of current and long-term liabilities, future prospects, etc.