Question

You know the following. ATO, ITO and FATO are 4, 6, and 3.9 respectively while for the industry they are 4.4, 19 and 4 respectively. The current ratio and quick ratio are 1 and 1.5 for the firm and 2.3 and 2.0 for the industry respectively. Net profit margin is 5.2% and 5% for the firm and the industry respectively. The ROE is 2% and 10% respectively. The average collection period and the average payment period are 10 and 25 days respectively, while for the industry they are 30 and 30 respectively. Evaluate the firm. Step by Step please.

Answer 1

The turnover ratios like the Asset turnover, inventory turnover and fixed asset turnover, determines the efficiency with which the assets are used to generate profits and earn revenue . The efficiency with which inventory are used to generate revenue. Fixed asset turnover, the efficiency with which the fixed assets are used to generate profits.

All of these ratios are below the industry average. With the poorest being, inventory turnover ratio. This company is not using its assets , inventory and fixed assets efficiently.

The liquidity ratios, indicate the liquidity position of the company. It determines the ability of the company to pay off its current liabilities, using its current assets.

Both the liquidity ratios is poor than the industry average , which indicates that the liquidity position of the company is weak.

The net profit margin is better than the industry, which indicates that the profit potential of the company is good.

The ROE is very poor in comparison to the industry , which indicates that the return to the equity investors on the equity investments is very poor.

The average collection period is better than the industry, which shows that the firm collects payments sooner, and pays to the creditors earlier than the Industry average.