Question

You have been hired as an analyst for Melvin Bank and your team is working on an independent assessment of TWINKY, which is a firm that specializes in the production and distribution of ice and glass products in Sweden. Your assistant has provided you with the following data about the company and its industry. You analysis should include intra-company, inter-company, and industry benchmark comparisons. What can you say about the firm's overall management in terms of the following? (Be as complete as possible given the above information, but do not use any irrelevant information).

1. 1 Liquidity
2. 2. Efficiency (operational efficiency)
3. 3.Performance (margins, profitability)
4. 4.Leverage

Ratio	2018	2017	2016	2018
				Competitor	Industry Average
Long-term debt	0.45	0.40	0.35	0.52	0.35
Inventory Turnover	62.65	42.42	32.25	46.30	65.75
Days’ sales in receivables	113	98	94	121	100.25
Debt to Equity	0.75	0.85	0.90	0.85	0.88
Profit Margin	0.082	0.07	0.06	0.075	0.12
Total Asset Turnover	0.60	0.65	0.70	0.80	0.55
Quick Ratio	1.028	1.03	1.029	1.10	1.16
Current Ratio	1.33	1.21	1.15	1.20	1.25
Interest coverage Ratio	0.9	4.375	4.45	4.20	4.65

Answer 1

1. To asses liquidity, we will see Quick Ratio, Current Ratio, Days’ sales in receivables and Debt to Equity.

The higher the current ratio the better - It slightly decreased to 1.2 in 2018 from 1.21 (2017). Also, it is low than industry average of 1.33 and that of competitor at 1.25. The lesser the current ratio, the less is the current asset and lesser is the liquidity.

The higher the quick ratio the better - It has imnproved from 1.03(2017) to 1.10 in 2018. Although the asset quality has improved with respect to industry average at 1.028, it still is below its competitor who is standing with 1.16. The more the quick ratio, the more is its current asset (minus inventory and prepaid expenses) and hence more liquid it would be.

Its days sales of receivable in 2018 is 121. Whereas, in 2017 it was 98. This means, it takes more days of time now to collect payment from customers and it now takes 23 more days time.(121-98). This is also quite high comapred to the competitor with 100.25 days and industry average of 113. In short, the liquidity measure vis-a-vis DSO has worsened.

On debt to equity ratio, it has done better than competitor. The d/e ratio in 2018 remained constant at 0.85; but, it was lower than competitor's at 0.88. Also, it remianed higher than industry average of 0.75.

2. To analyze operational efficiency, we will use Inventory Turnover and Total Asset Turnover.

The higher the inventory turnover ratio, it signifies, the more quick the company is able to sell its products with respect to a given inventory level; and, hence more operationally efficient it is. The company's ratio on 2018 is at 46.30 which is far lower than industry at 62.65 and competitor at 65.75. But, it can be said that it did some improvement with respect to 2017 when it was at 42.42.

The asset turnover ratio was 0.8 in 2018 better than its own performance in 2017 when it was having 0.65 and, industry with 0.60, as well as, competitor with 0.55. It has performed well, the sales have improved with respect to its assets. Thus, we can say the higher the ratio, the more efficient it is.

3. On the profit margin front, the profit margin grew to 7.5% in 2018 compared to 7% in 2017. However, the profit margin is much less than competitor with 12% and also industry average with 8.2%.

4. To assess leverage debt-equity ratio and interest coverage ratio are to be referred.

Above, we have seen, on debt to equity ratio, it has done better than competitor. The d/e ratio in 2018 remained constant at 0.85; but, it was lower than competitor's at 0.88. Also, it remianed higher than industry average of 0.75.

Interest coverage ratio is measured by dividing operating income by the interest expenses and showcases the company's ability to make interest payments. Hence, the higher operating insome, the higher be the ratio and more would be th efficiency. It has decreased to 4.2 in 2018 from 4.375 in 2017. It is also less than competitor; who is having 4.65. Howver, the industry average of 0.9 is quite paltry as compared to them.

In my view, the too much increase in DSO, perhaps blocks the assets and reduces efficiency. If DSO gets decreased, the cash flow would improve and hence, the efficiencies allowing the company to enjoy better liquidity.