Question

You have been hired as an analyst for sterling professional consult and your team is working on an independent assessment of DD food inc. (DDF Inc). DDF Inc is a firm that specializes in the production of freshly imported farm products from France. Your assistant has provided you with the following data for DDF Inc and their industry.

Ratio		2017		2016		2015		industry average
Long term debt		0.45		0.4		0.35		0.35
inventory turnover		62.65		42.42		32.25		53.25
depreciation/total asstes		0.25		0.014		0.018		0.015
days sales in receivables		113		98		94		130.25
debt to equity		0.75		0.85		0.9		0.88
profit margin		0.082		0.07		0.06		0.75
total asset turnover		0.54		0.65		0.7		0.4
quick ratio		1.028		1.03		1.029		1.031
current ratio		1.33		1.21		1.15		1.25
interest cover		0.9		4.375		4.45		4.65
equity multiplier		1.75		1.85		1.9		1.88

You have been hired as an analyst for sterling professional consult and your team is working on an independent assessment of DD food inc. (DDF Inc). DDF Inc is a firm that specializes in the production of freshly imported farm products from France. Your assistant has provided you with the following data for DDF Inc and their industry.

Ratio		2017		2016		2015		industry average
Long term debt		0.45		0.4		0.35		0.35
inventory turnover		62.65		42.42		32.25		53.25
depreciation/total asstes		0.25		0.014		0.018		0.015
days sales in receivables		113		98		94		130.25
debt to equity		0.75		0.85		0.9		0.88
profit margin		0.082		0.07		0.06		0.75
total asset turnover		0.54		0.65		0.7		0.4
quick ratio		1.028		1.03		1.029		1.031
current ratio		1.33		1.21		1.15		1.25
interest cover		0.9		4.375		4.45		4.65
equity multiplier		1.75		1.85		1.9		1.88

In the annual report to the shareholders, the CEO of DDF Inc wrote, 2017 was a good year for the firm with respect to our ability to meet our short –term obligations. We had higher liquidity largely due to an increase in highly liquid current assets (cash, account receivables and short term marketable securities). Is the CEO correct? Explain and use only relevant information in your analysis.

What can you say about the firm’s asset management? be as complete as possible given the above information ,but do not use any irrelevant information.

You are asked to provide the shareholders with an assessment of the firm’s solvency and leverage .be as complete as possible given the above information, but do not use irrelevant information.

Answer 1

Yes , the CEO is right in saying that 2017 was a good year for firm with respect to meeting short term obligations as the current ratio has risen sharply to 1.33 from 1.21 a year ago.But if we look at the quick ratio(1.028) then the year is very normal as compared to previous years because its almost at the same level as the previous year and it is almost equal to the industry average.So the conclusion is that the increase in the current ratio is due to the inventory increase and not due to the cash and cash equivalents increase.

The company's asset management does not look in a great shape as the long term debt (0.45) keep on rising year on year and is well above the industry average(0.35).Also profit margins(0.082) are very low as compared to the industry average(0.75).But the asset turnover is really good which means the company is using their assets very efficiently to generate sales which is way above the industry average.

As far as the shareholders are concerned, interest coverage ratio(0.9) is very low which means they are unable to service their debt properly. Also the equity multiplier(1.75) is lower than the industry(1.88) which is a cause of concern in case of solvency issues for the shareholders.