Question

Justify and explain the financial performance of the company for each of the calculated financial ratios for the FY 2018 & 2019 (taken as average) :

1) AGE OF ACCOUNT RECEIVABLE = 23 DAYS

2) INVENTORY TURNOVER IN DAYS = 42 DAYS

3) CURRENT RATIO = 1.58

4) LIQUID RATIO = 0.56

5) RETURN ON ASSET = 1.93%

6) EQUITY RATIO = 0.55

7) RETURN ON EQUITY = 3.5%

8) NET PROFIT = 1.02%

Answer 1

Explaining the performance of the company on the basis of different ratios which are available-

1. Age of account receivables is 23 days which could be said as a quick recovery process.

2. Inventory turnover is average, inventory turnover day should be lower,as it means that company should more frequently sell its inventory.

3. Current ratio of the company is good at current ratio of more than one is preferred and liquid ratio is not that good because inventory is consisting of a large amount of current assets.

4. Return on assets is not that higher, it should have been in the range of double digits and equity ratio to the overall capital is quite good because the company has 55% of equity and 45% of debt.

5. Return on equity and profit margin needed to be enhanced because a better growing company need to have these profitability margins in double digit in order to survive and sustain in the long run to maximize the overall profit.