Question

	Ratio	2018	2017	2016	2018-industry average
1	Inventory turnover	62.65	42.42	32.25	53.25
2	Days's sales in receivables	113	98	94	130.25
3	Debt to Equity	0.75	0.85	0.9	0.88
4	Profit Margin	0.082	0.07	0.06	0.075
5	Total Asset Turnover	0.54	0.65	0.7	0.4
6	Quick ratio	1.028	1.03	1.029	1.031
7	Current ratio	1.33	1.21	1.15	1.25
8	Times interest Earned	0.9	4.375	4.45	4.65

Required

You are asked to provide the shareholders with an assessment of the firm's asset management ,profitability,efficiency,solvency and leverage .Be as complete as possible given the above information ,but do not use any irrelevant information

Answer 1

Asset management – Asset management of the firm can be gauged from the firm’s total asset turnover and inventory turnover.

Total asset turnover is = net sales/Average total assets. From the provided figures that the total asset turnover for the company has been decreasing on a year-to-year basis. It was 0.7 in 2016 and declined consistently to 0.54 in 2018. On the bright side the 2018 figure is above the industry average of 0.4. The company should keep a check on its total asset turnover so as to ensure that they do not fall in future and hence ensure that assets are utilized more efficiently to generate sales.

Inventory turnover = cost of goods sold/average inventory. The company’s inventory turnover has been increasing on a year-to-year basis. It was 32.25 in 2016 and went on to touch 62.65 in 2018. Also it was above the industry average figure of 53.25. Thus the company is using its inventories in an efficient manner to generate sales.

Profitability – Profitability of the firm can be gauged by its profit margin. Profit margin = net income/sales.

The company’s has been generating good profits and its 2018 margin of 0.082 is much higher than the industry average of 0.075. Also what is working in favor for the company is that its margin has been increasing on a year-on-year basis. A margin of 0.082 for 2018 means that the company is earning $8.20 as profit for every $100 as sales.

Efficiency – Efficiency of the company can be gauged from its days sales in receivables. Days sales in receivables = average debtors/average daily credit sales. The company’s days sales in receivables has been increasing on an annual basis from 94 days in 2016 to 113 days in 2018. This shows that the company’s efficiency with regards to its dues collection has been reducing. On the bright side the company’s 2018 figure is lower than the industry average of 130.25 and this shows that the company is more efficient than its competitors when it comes to efficiency of collection of credit sales.

Solvency – Solvency can be measured using quick ratio and current ratio.

Current ratio = current assets/current liabilities. The company’s current ratio has been increasing on a year-to-year basis and this means that the company’s ability to pay off its short term obligations and liabilities has been increasing consistently. The company’s current ratio is also better than the industry average and this means that the company is better than its competitors when it comes to liquidity and solvency.

Quick ratio is = (current assets – inventories)/current liabilities. This is a more stringent measure of liquidity and solvency. The company’s quick ratio is less than the industry average and this means that a large part of the company’s current assets are held in the form of inventory.

Leverage – This will be measured using the ratios debt to equity ratio and times interest earned ratio.

Debt to equity ratio = total debt/total equity. The company’s use of debt has been falling constantly as can be seen from the falling values of debt/equity ratio. This means that the company is using lower levels of debt and this is good as risk associated with debt is falling.

Times interest earned = profit before interest and taxes/interest. For the company this ratio has declined considerably in 2018 to 0.9. It was 4.375 in 2017. This is a red flag and shows that the firm’s ability to meet its interest burden is now very low and this is a cause for concern.