By traditional measures, the company s current ratio (2.5 to 1) and quick ratio (1 .2 to 1) appear quite adequate.

The company also generates a positive cash flow from oper ating activities which is twice the amount of its dividend payments to stockholders.If this is a typical year, the company appears reasonably liquid. The 10.5% return on assets is adequate by traditional standards. However, the 5% return on equity is very low. The problem arises because of Rentsch, Inc. s relatively large interest expense, which is stated as $84,000 for the year. If Rentsch cannot earn a return on assets that is higher than the cost of borrowing, it should not borrow money. Long-term creditors do not appear to have a high margin of safety. The debt rati o of 70% is high for American industry. Also, debt is continuing to rise. During the curr ent year, the company borrowed an additional $50,000, while repaying only $14,000 of exist ing liabilities. In the current year, interest payments alone amounted to nearly twi ce the net cash flow from operating activities. If the current year is typical, it is doubtful that Rentsch, Inc. can continue i ts $20,000 annual dividend. In the current year, investing activities consumed more than th e net cash flow from operating activities. This company is not earning the money it pays out as dividends; it is borrowing it.