The acid-test ratio showed Lester/Shang-wa their ability to use short-term assets to cover its immediate liabilities without selling their inventory. To calculate this ratio Lester would add up cash, account receivables and short-term investments then divide that sum by its current liabilities. All of the companies involved in the scenario have am acid-test ratio greater than 1 with an overall average of 1.21. The acquisition of Shang-wa by Lester has decreased their ratio and is below the competitive average, which could be a concern.
Accounts Receivable Turnover Ratio
The A/R turnover ratio would gauge of how effective Lester/Shang-wa is at managing their credit it extends to its customers. The competitive average with these companies is 5.36. Both Lester and Shang-wa by themselves are above this number but when they are combined they significantly below the average. This may be an area of concern for Lester.
Lester needed to look at its current ration to determine its ability to pay back short-term liabilities. To calculate this ratio Lester needed to look at its current ratio, which is the current assets of the company divided by its current liabilities. The higher the ratio for Lester than that means the more capable they where in paying off its short tem liabilities. When looking at the four companies involved in this scenario Lester has the greatest current ratio, but they are all very close to each other. After the acquisition of Shang-wa, Lester’s current ratio drops from 2.95 to 1.74. This could be an area for concern for Lester considering their new consolidated current ratio has dropped lower than the competitive average. This could be a red flag for funding but also a great opportunity to maximize wealth.
Days Sales Outstanding, DSO
The DSO ratio would compute the average number of days takes Lester/Shang-wa to collect revenue after a sale has been made. Lester/Shang-wa...