Question

Question 7 of 21Financial ratio data is listed below for Gallery of Dreams. Select the answers that are strengths for the firm after analyzing the ratios. Gallery of Dreams Ratios Ratio Industry 2015 2014 2013 Current 2.50x 4.48x 4.06x 3.48x Quick 0.80x 1.47x 1.18x 0.96x Average collection period 11 days 16 days 15 days 9 days Inventory turnover 2.30x 1.19x 1.24x 1.37x Days payable outstanding 15 days 11 days 12 days 8 days Fixed asset turnover 17.50x 9.74x 9.09x 8.85x Total asset turnover 2.80x 1.50x 1.67x 1.82x Debt ratio 62.00% 29.47% 34.04% 39.17% Long term debt to total capitalization 25.53% 14.09% 18.91% 22.33% Times interest earned 9.93x 22.02x 19.00x 14.23x Fixed charge coverage 8.69x 4.59x 4.47x 4.25x Gross profit margin 31.10% 59.21% 59.39% 58.52% Operating profit margin 8.06% 22.05% 21.86% 20.52% Net profit margin 4.32% 11.89% 11.00% 10.97% Return on investment 9.21% 17.97% 18.28% 18.35% Return on equity 11.34% 24.14% 27.51% 29.88% (Points : 12)

        Inventory turnover is below industry average and is extremely low indicating the firm does not move inventory well
        Profitability is excellent with gross, operating and net profit margins above industry average and increasing all years with the exception of gross profit margin which decreased slightly in 2015
        Interest is covered by profits as are lease payments and the number of times covered has increased each year
        The average collection period is increasing and is now above industry average
        Current and quick ratios are above industry average and increasing
        Accounts payable are paid in a timely manner

Answer 1

Following are the ratios that are strength of firm :

Current Ratio (4.48x): The current ratio measures a company’s current assets against its current liabilities. The current ratio indicates if the company can pay off its short-term liabilities in an emergency by liquidating its current assets. Current assets are found at the top of the balance sheet and include line items such as cash and cash equivalents, accounts receivable and inventory, A high ratio indicates a high level of liquidity and less chance of a cash squeeze. A current ratio that is too high, however, may indicate that the company is carrying too much inventory, allowing accounts receivables to balloon with lax payment collection standards or simply holding too much in cash.The gallery of dream current ratio increases too much as compare to previous years and correspondingly its days payable outstnding also increases which indicates that amount in account receivable may be high.So the company should work out on trade receivable to maintain its current ratio standard.

Inventory turnover (1.19x) : Inventory turnover ratio of company also increases as compared to previous year but if compared with industry average it is declining which is good indicator but if company want to maintain its standard should work on to clear inventory more frequently to decrease its stock blockage.

Fixed assets Turnover ratio & Return on Investment :As compared to previous year company fixed assets turnover ratio is increasing but it is below the industry average , company to stand in market need to increase it expansion , correspondingly looking at return on investment it is slightly low as compared to previous year but higher than industry average .Overall looking at the Company position Company is able to get more return on low fixed assets as compared to industry which is a good indicator.

Debt Ratio , Long term debt to total Capitalization ,times interest earned and Fixed Charge Coverage :Company  Debt Ratio and Long term debt to total Capitalization decreases comparatively from past years which indicate more of equity oriented company & company times interest earned ratio also increases which is good indicator and best to invest in shares while looking at fixed charge coverage it is comparatively decreases may be due to lender demand to less margin on mortgage.

Gross Profit Margin and Operating profit margin: Company's growth in Gross Profit Margin and Operating profit margin is too good compare to previous year and industry average which indicates operating efficiency of Company & Company is able to stand long term in market.

Net Profit margin and Return on Equity: Company have very slight growth in net profit margin as compared to gross profit margin , may be more of due to higher of administrative and office expenses ,Company need to lower such expenses to have a higher growth in net profit .Despite of increase in Net profit Margin , Company Return on equity lowers as compared to previous year which indicates profit is kept aside as reserves for expansion purpose and investors get higher return on longer period on success of such projects.