In: Finance
Green caterpiller garden supplies inc did not issue new shares during these three years and has faced some operational difficulties. The company has thus piloted some new forecasting strategies to improve its operations management. You have collected the relevant data, made reasonable assumptions based on the information available, and calculated the following ratios. Ratios Calculated
Year 1 Year 2 Year 3
Price to cash flow 4.60 5.98 6.70
Inventory turnover 9.20 11.04 12.37
Debt to equity 0.60 0.64 0.77
Based on the preceding information, your calculations, and your assumptions, which of the following statements can be included in your analysis report? Check all that apply.
Green caterpiller supplies inc's ability to meet its debt obligations has worsened since its debt to equity ratio has increased from 0.60 to 0.77
An improvement of the inventory turnover ratio could likely be explained by the new sales forecasting strategies that led to better inventory management
A plausible reason why Green caterpiller supplies inc's price to cash flow ratio has increased is that investors expect higher cash flow per share in the future
The companies creditworthiness has improved over these three years as evidenced by the increase of its debt to equity ratio over time
Option 1 :
Debt to Equity Ratio = (Short Term Debt + Long Term Debt + Other Fixed Payment) / Shareholder's Equity
As you can see, the Debt to Equity Ratio has increased every year from 0.60 to 0.77, the first statement is true that the Green Caterpiller Supplies inc's ability to meet debt obligations has worsened.
Option 2:
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventories
The Inventory Turnover Ratio has improved and it can be explained by new sales forecasting strategies because with the help of such strategies, inventory management becomes easier which will affect the denominator. And better sales forecasting strategies will also help in controlling cost of goods sold. Hence statement 2 is true.
Option 3 :
Price to Cash Flow = Share Price / Cash Flow Per Share
Increase in Price to cash flow ratio means that the company is over valued. Essentially Investors are expecting the cash flow to get better and in anticipation of that, investors are ready to pay high amount against the existing cash flow. Hence Option 3 is true.
Option 4 :
This statement is not necessarily true. The debt of the company can increase by leasing the fixed assets of company which does not imply good credit worthiness. Hence to study the credit worthiness, only debt to equity ratio is not sufficient. so Option 4 is not true.