Question

We have Hagbarth, Martinez and Victoria whose ITO and ATO are 11 and 10 respectively and rising, while the industry’s are 4 and 3. Liquidity ratios are comparable to the industry. Net profit margin and gross profit margin are 1% and 2% respectively and slightly rising. The two profitability measures for the industry are 12% and 21% respectively. Additionally, D/E and D/TA are 60/ 40 and 60/100 respectively, while the equivalent ratios for the industry are 25/75 and 25/100. The times interest and the fixed payment coverage ratios are 3 and 2 while for the industry they are 7 and 5. The average collection and the average payment periods are equivalent to the industry. Expound on this situation. Give your thoughts on the performance of this firm. If the firm is doing well (badly), why is it doing well (badly). What suggestions would you make, if any?

Answer 1

Inventory turnover ratio and asset turnover ratio are higher than the industrial standard. Higher inventory turnover ratio indicates better performance as it shows that inventories are being sold quickly. Asset turnover ratio measure how productive the firm is in managing all its assets to generate sales, therefore higher the ratio of asset turnover better is the company's performance profitability ratios are lower than the industrial standard. Profitability ratios measures the firms success in generating income and it reflects the combined effects of firms asset and debt management. Therefore lower the values of ratio it may indicate forms declining performance. The debt ratio are significantly higher than the industry standard, it shows that company has higher amount of debt then it asset. The firm is not doing well at the form is not able to generate enough profit and income stream, and also company and higher that when compared to excite because of which it may be difficult for the company to undergo any expansion plan and the company may find it expensive to borrow and could find itself in a crunch if circumstances changed.