Question

You have been hired as an analyst for Bank WA and your team is working on an independent assessment of a firm that specializes in the production of freshly imported farm products from New Zealand. Your assistant has provided you with the following data about the company and its industry.

Ratio	2019	2018	2017	2019- Industry Average
Long-term debt	0.45	0.40	0.35	0.35
Inventory Turnover	62.65	42.42	32.25	53.25
Depreciation/Total Assets	0.25	0.014	0.018	0.015
Days’ sales in receivables	113	98	94	130.25
Debt to Equity	0.75	0.85	0.90	0.88
Profit Margin	0.082	0.07	0.06	0.12
Total Asset Turnover	0.54	0.65	0.70	0.40
Quick Ratio	1.028	1.03	1.029	1.031
Current Ratio	1.33	1.21	1.15	1.25
Interest coverage Ratio	0.9	4.375	4.45	4.65

Q) 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.                   

Answer 1

1. Long term debt

Long term debt as a % is increasing year on year basis. It is higher than industry standard. Higher level of debt leads to higher financial leverage. The fixed interest expense will increase. Hence firm should ensure higher profits are generated to service debt cost. In the given case Interest coverage ratio has decreased during the year 2019. In the long term interest cost will affect solvency of the firm if profit generated are lower and if firm is unable to repay principal and interest component

2. Inventory turnover

Inventory turnover has been improving year on year basis. It is higher than industry standard. It is good sign for the firm since inventory days on hand will reduce. Lower Inventory on hand reduces working capital requirement. Hence inventory management is good

3. Day’s sales in receivable

Days sales in receivable represents the number of days the receivable is outstanding. Based on industry standard the firm is having better day’s sales in receivable. But there has been year on year increase which means the firm is extending credit to its customers. The firm should extend credit to customers based on cost benefit analysis only. Discount should be offered for early collections if savings is higher than discount offered.

4. Total Assets turnover

The total asset turnover is higher than industry standard which is good sign. But internally the asset turnover is decreasing year on year basis which is not good from internal benchmarking point of view. The firm should generate more sales out of assets to ensure its assets are efficiently used in the business. There has been higher investment in fixed assets during the year 2019 hence there is higher depreciation cost and also total assets turnover ratio has decreased

5. Quick Ratio

Quick ratio is consistent year on year basis and in line with industry standard. Hence it is well managed

6. Current Ratio

Current ratio too is consistently increasing year on year basis and above industry standard. Hence it is well managed.