Question

Select all the correct statements based on the following company and industry ratios

Company	Industry average
ROE	15%	18%
ROA	13%	10%
PM	11%	11.5%
FATO	38	97
EM	14%	12%

. The company should reevaluate its pricing strategy and seek higher quality suppliers

. The company should rely more on debt financing

. The company should issue more stock and use the proceeds to pay down debt

. The company should invest more in property plant and equipment.

. The company should sell some of its fixed assets to generate greater cash flow

Answer 1

The company should reevaluate its pricing strategy and seek higher quality suppliers

Yes. The company's Profit margin is lower than the Industry standards. A change in pricing strategy and higher quality products can help the organisation.

The company should rely more on debt financing

Yes.The ROE of the company is lower than the industry standard where are the ROA is significantly higher than the industry standards. This indicates that organisation doesn't have as much debt as the other units in the industry.

The company should issue more stock and use the proceeds to pay down debt

No. The companys ROE ( Return on Equity ) is already lower than the industry standards. This is a reflection of the fact that the company is not generating enough return on the existing investment as the industrial players.

The company should invest more in property plant and equipment

NO. The FATO ( Fixed Asset Turnover Ratio ) of the company is considerably lower than the Industry Standard of 97.

Fixed Asset Turnover Ratio (FATO)	=	Net Sales
		(Fixed Assets- Accumulated Depreciation)

FATO reflects how efficiently the assets are being used. A higher FATO indicates that more revenue is gegerated from the assets and this suggests that the existing assets are efficiantly used.

Since the FATO of the organisation is lower than industry standards , it indicates that the assets are not efficiently used. The company should not invest more in property plant and equipment but rather use the existing ones more efficiently.

The company should sell some of its fixed assets to generate greater cash flow

Yes.The FATO of the entity in comparison with the industry standards indicates that the assets are not efficiently used. Liquidating assets is one of the ways to improve FATO and release the capital which has been blocked unnecessarly in the inefficient assets.