Question

Based on the below information:

Liquidity Ratio		2013-12	2014-12	2015-12	2016-12	2017-12
1	Current Ratio = CurrentAssets / Current Liabilities	0.826892	0.818622	0.789666	0.86939	0.815876
2	Quick Ratio = ( Cash and equivalents + receivables)/ current liabilities	0.526964	0.504773	0.436861	0.525862	0.49807
3	net working capital-to-sales ratio = (Current Assets - Current Liabilities)/ Sales	-0.0295	-0.02975	-0.04375	-0.02846	-0.04485
Operating performance ratio
1	Days of Sales in Inventory = 365/ Inventoryturnover	17.71466	19.41963	28.73953	30.66475	34.03286
2	Days of Sales in Receivables = 365/ receivable turnover	28.75343	25.94051	27.9565	35.7206	39.39461
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Profitability ratios
1	Gross Profit Margin = Gross profit / sales	0.21002	0.204603	0.204911	0.178914	0.231589
2	Operating profit margin = operating profit / sales	0.137156	0.131731	0.08585	0.038526	0.081274
3	Net profit margin = Net profit / sales	0.077417	0.082516	0.062238	0.035863	0.083108
Return on Investment ratios
1	Basic Earning Power ratio = EBIT / Total assets	0.166432	0.148547	0.066151	0.025497	0.055278
2	ROA = Net Income / Total assets	0.093942	0.093049	0.047957	0.023735	0.056526
3	ROE = Netincome/ Shareholder equity	0.187238	0.186469	0.094549	0.046855	0.105015

How liquid is the company?

Is management generating substantial profit on the company's assets?

If management of the company would like to improve the company's financial performance, what should the management do?

Answer 1

Ans 1) Company is not liquid enough because most of the liquidity ratio is less than one which tells that current liabilties are mroe than current asset which make this firm less liquid.It need to be more than 1 to be liquid enough to take care of its short term liabilties.

Ans 2) Though management is generating postive return on asset but we can't say it is substantial due to decrease in this ratios towards the year 2015 to 2017 in comparision oto 2013 and 2014.

Ans 3) Advice to management:

1. Increase the liqiudity ratio and maintain positive net working capital. It can be done by either reducing the liabiltiy or increading the asset but reducing the liability is advicable due to less return on asset, increasing the asset will put more pressure on the return on asset.

2. Operaitng performance ratio is deteriorating from 2012 to 2017, management should make sure that these days should be minimize because it is keeping moeny and end product idle and company is losing opportunity cost on it and also increaing the inventory cost.

3. Company should try to reduce the operating expenses because it is impacting the net income.

4. Company should try to reduce its debt by its retained earning.