Question

Financial ratio data is listed below for Gallery of Dreams. Construct a list of strengths and weaknesses for the firm after analyzing the ratios.

Gallery of Dreams Ratios
Ratio	Industry	2015	2014	2013
Current	2.50x	4.48x	4.06x	3.48x
Quick	0.80x	1.47x	1.18x	0.96x
Average collection period	11 days	16 days	15 days	9 days
Inventory turnover	2.30x	1.19x	1.24x	1.37x
Days payable outstanding	15 days	11 days	12 days	8 days
Fixed asset turnover	17.50x	9.74x	9.09x	8.85x
Total asset turnover	2.80x	1.50x	1.67x	1.82x
Debt ratio	62.00%	29.47%	34.04%	39.17%
Long term debt to total capitalization	25.53%	14.09%	18.91%	22.33%
Times interest earned	9.93x	22.02x	19.00x	14.23x
Fixed charge coverage	8.69x	4.59x	4.47x	4.25x
Gross profit margin	31.10%	59.21%	59.39%	58.52%
Operating profit margin	8.06%	22.05%	21.86%	20.52%
Net profit margin	4.32%	11.89%	11.00%	10.97%
Return on investment	9.21%	17.97%	18.28%	18.35%
Return on equity	11.34%	24.14%	27.51%	29.88%

 

Answer 1

Liquidity profile of the company can be determined by the ratios like Current assets, quick ratio, average collection period, inventory turnover and days payables outstanding.Gallery of Dreams seems to be highly liquid when considering the company's current asset ratio which is well above the industry average and has been increasing. Similarly, Quick ratio has also improved over the years indicating there is no problem with the company's liquidity profile and that Gallery of Dreams is in a good position to meet its short term obligation
However, looking at the company's inventory turnover, there seems to be some problem with inventory management as the inventory turnover ratio is much lessser than the industry average and has also declined over the years. Similaly, average collection period have increased in the past three years and is more than the industry average which means that there is a problem in converting the company's business to cash and better credit terms is required to improve the collection period . Day payables outstanding, on the other hand has also increased over the years which is good. The longer it takes to pay its creditors the more money the company has in hand which is good for working capital and free cash flow.

Asset Turnover Analysis : The company's Fixed Asset turnover and Total Asset turover ratios are not strong as compared to the industry average. This indicates that the assets are not well utilized in generating sales. The company should focus on a better utilization of its assets and try to increase their efficiency.

The company's capital structure has less of debt as compared to equity and assets owned by the company. Also, Times interest earned is very strong as compared to the industry average and has increased over the years which means the company has a very good solvency profile. Fixed charge ratio though less than industry average yet has increased over time leading to a better payoff situation for the company. These ratios thus, suggests that the company has a good capital structure with less focus on debt and good solvency ratio leading to a position wherein they can meet their long term obligations effectively.

Gross profit margin,operating margin and net profit margin have increased over the years and is well above the industry average. The company has a very good profitabilty ratio and has been able to manage its operating activities very efficiently.
Return on investment and Return on Equity is also higher than their peers but has decreased over the years, this could possibly due to increase in the company's investments and equity expansion. The returns are strong and represents a positive outlook for the company.