Question

Edna Millay Inc. is a manufacturer of electronic components and accessories with total assets of $20,000,000. Selected financial ratios for Millay and the industry averages for firms of similar size are presented below.

Edna Millay	2017 Industry
	2015	2016	2017	Averages
Current ratio	2.09	2.27	2.51	2.24
Quick ratio	1.15	1.12	1.19	1.22
Inventory turnover	2.40	2.18	2.02	3.50
Net sales to stockholders’ equity	2.71	2.80	2.99	2.85
Return on common stockholders’ equity	0.14	0.15	0.17	0.11
Total liabilities to stockholders’ equity	1.41	1.37	1.44	0.95

Millay is being reviewed by several entities whose interests vary, and the company’s financial ratios are a part of the data being considered. Each of the parties listed below must recommend an action based on its evaluation of Millay’s financial position.

Archibald MacLeish Bank. The bank is processing Millay’s application for a new 5-year term note. Archibald MacLeish has been Millay’s banker for several years but must reevaluate the company’s financial position for each major transaction.

Robert Penn Warren. A brokerage firm specializing in the stock of electronics firms that are sold over-the-counter, Robert Penn Warren must decide if it will include Millay in a new fund being established for sale to Robert Penn Warren’s clients.

Working Capital Management Committee. This is a committee of Millay’s management personnel chaired by the chief operating officer. The committee is charged with the responsibility of periodically reviewing the company’s working capital position, comparing actual data against budgets, and recommending changes in strategy as needed.

Instructions

b) For each of the four entities, identify two financial ratios, from the ratios presented above that would be most valuable as a basis for its decision regarding Millay.

Short answer

The current ratio and Stock turnover ratio.

Step-by-step solution

Meaning of Current Ratio

The current ratio is a measurement of a company's total short-term liquidity as well as its ability to repay short-term debt. It can be found by dividing the current asset by current liabilities.

Explaining most valuable as a basis for its decision regarding Millay

The following are two ratios for each of the four compounds used to make Edna Millay Inc.:

The current or quick ratio, as well as the overall liabilities to value ratio, can be used by Archibald MacLeish Bank.

As with stock turnover, the Robert Lowell Corporation can employ either the current or quick ratio,or include the liabilities to equity ratio.

Net transactions can be used to estimate the value and return on common stock equity for its shareholders by Robert Penn Warren.

The current or quick ratio, as well as stock turnover, can be checked by the working capital management committee.