Question

(Industry)                                 Kingston, 2018            Kingston, 2019

i.          Gross Profit Margin (50%)                                      48.9%                          48.9%

ii.         Operating Profit Margin (15%)                                15.1%                          13.3%

iii.        Net Profit Margin  (8%)                                           10.6%                            9.3%

iv.        Return on Assets  (10%)                                          14.5%                          12.5%

v.         Return on Equity  (20%)                                          24.1%                          20.3%

vi.        Current Ratio  (1.5)                                                    1.63                             1.62

vii.       Quick Ratio  (1.0)                                                      1.00                             1.04

viii.      Debt to Total Asset  (0.5)                                             .4                                 .39

ix.        Times Interest Earned  (25)                                      15.5X                          14.6X

x.         Average Collection Period (45 days)                       53.5days                      61.6days

xi.        Inventory Turnover  (8)                                             8.18X                          8.62X

xii.       Total Asset Turnover  (1.6)                                        1.4X                            1.3X

Discuss the financial strengths and weaknesses of Kingston based on the ratios provided here.

Comment on whether a lender would be willing to extend a new loan to this company. Please distinguish between the concerns of a lender considering short-term financing versus providing long term loans to a company.  Please specify which ratios would be of most interest to each lender.

Answer 1

On looking after the following ratio following observatios can be drawn:

1. Companies profit ratios are good and highly satisfactory on comparison to the ratios according to the industrial standards which ensures the reliance on the performance, objectives, working of the Kingston companies management.

2. Companies Return on Assets and Return on Equity ratios are also quite impressive.They are well performing ratio that to on a consistent basis.Any investor will be willing to make an investment in it.

3. Companies liquid Ratio is also up to the standards.

4. Somehow current ratio does not look althat good of such a good performing company.It is disappointing to have a below par current ratio which means its assets are less in comparison to it's Liabilities which is not a good indicator for Kingston.

5. Another weakpoint that is being reflected from the above ratios is that the company is not much effecient in their debtors collection period they are having a long receivable cycle than the acceptable standards.

Any lender willing to invest will be ready to investment in the Kingston due to it's good earning ratios and much lesser debt as compared​ to its assets.

The lender will be more willing in the ratios like net profit ratio, return on Equity, return on assets ratio ,debt to assets ratio. All of being quite important to a lender who is willing to earn more but the most important from all of them is times interest earned ratio because it will help an investor in knowing how much and in what period he would be able to earn on its investment.

Lender should focus towards short term financing in the initial period because there might be various factors like new technology, new products,higher profits yielding more return but in the long run there may be chances that competitiors might develop the same technology and the Prof it's could decrease.so first focus on short term financing and if the results are satisfactory long term financing can be considered.