Question

based on the ratios completed above)

	Industry	Lululime Ltd. Ratios
	2020	2020	2019	2018
Profit margin	5.81%	5.5%	5.62%	6.25%
Return on assets	8.48%	6.34%	7.79%	9.38%
Return on equity	10.10%	14.24%	15.72%	17.05%
Receivable turnover	9.31 ×	6.54x	7.8x	10x
Average collection period	35.6 days	55.8 days	46.7 days	36.5 days
Inventory turnover	5.84 ×	4x	3.9x	3.8x
Capital asset turnover	2.20 ×	1.84x	2.5x	2.72x
Total asset turnover	1.46 ×	1.14x	2.5x	1.5x
Current ratio	2.15 ×	1.45x	1.78x	2.25x
Quick ratio	1.10 ×	0.8x	0.91x	1
Debt to total Assets	40.10%	55.4%	50.4%	45%
Times interest Earned	5.26 ×	3.17x	4.75x	5.67x

1. What the Ratios Tell Us About the Company in General or its Financial Management?

2. How the Ratios Affect the Decision Whether to Grant Short-term Credit or Long-term Credit, or to Buy Shares in the Company

Answer 1

In comparison to the industry averages, Lululime Ltd's performance in almost all parameters is poor. in 2020. Moreover, there has been a steady decline from the 2018 ratios.

Though Return on Equity is still higher than industry average, both profit margin and return on assets are lower, and have been declining since 2018. One would hesitate to invest in the company, given the fact that all the three profitability ratios, i.e, profit margin, return on assets and ROE have been declining year on year since 2018, and also because the margin and ROA lags the industry.

Receivables turnover is 9.31 times for the industry, while that of the company is only 6.54 times, which indicates that the company is not as efficient as its peers in converting credit sales into cash. As a result, the average collection period of 55.8 days is far higher than the industry average of 35.6 days.

Inventory turnover too is lower than the average player in the industry.

Capital and total asset turnover ratios are also lagging, which indicate that sales dollars being generated per dollar of investment is also falling.

Both current and quick ratios are well below industry averages, which indicate that the liquidity position of the company is not as good as its peers. Therefore, obtaining short term credit might become increasingly difficult for the company.

While the average organization in the industry has a debt ratio of 40.10 %, the company has very high debt ratio of 55.4 %. The high financial leverage can turn into financial risk sooner than later. This in fact is borne out by the decreasing times interest earned. Therefore, obtaining long term credit too can be difficult for the company.