Question

Evaluate the current situation at Premier Furniture using ratio analysis for Designers and Walcott. Discuss the ratios given. Specifically, we need a ratio analysis for Designers and Walcott.

It's in the company’s interest to know the difference between a good customer and a bad risk.

Designer's Ratio Analysis
Ratios		31 Jan.1982	31 Jan.1983	31 Jan. 1984
Liquidity Ratios
Current Ratio	Current Assets / Current Liabilities	2.4	2.28	2.7
Quick Ratio	(Current Assets - Inventory)/ Current Liabilities	1.07	1.08	1.29
Asset management / Activity ratios
Total assets turnover ratio	Net Sales / totat assets	2.16	1.62	1.53
Fixed assets turnover ratio	Net sales / net fixed assets	9.12	7.76	7.02
Days sales outstanding (DSO)	Receivables / (annual net sales/365)	47.6	68.12	70.97
Inventory turnover	(COGS) / Inventories	3.54	2.82	2.82
Average sales per day	Annual Net Sales / 365	29.1	22.97	22.68
Debt management / Leverage ratios
Debt to assets ratio	Total debt / Total assets	0.6	0.68	0.69
Liabilities to assets ratio	Total liabilities / total assets	0.7	0.8	0.78
Debt to equity ratio	Total debt / Total common equity	4	6.75	6.21
Times-interest-earned (TIE) ratio	EBIT / Interest expense (not reported)	NA	NA	NA
Average purchase per day	COGS / 365	17.7	14.04	14.12
Days payable	Accounts payable / (COGS / 365)	48.87	61.96	65.49
Profitability ratios
Profit margin	Net income / Net sales	0.04	0	0
Operating profit	EBIT/ Net Sales	0.06	0.02	0.02
Basic earning power (BEP)	EBIT/ Total assets	0.12	0.03	0.03
ROA	Net income / total assets	0.09	0	0
ROE	Net income / common equity	0.61	-0.01	-0.04

	Walcott's Ratio Analysis
Ratios		31 Jan.1983	31 Jan. 1984
Liquidity Ratios
Current Ratio	Current Assets / Current Liabilities	1.39	1.46
Quick Ratio	(Current Assets - Inventory)/ Current Liabilities	0.75	0.81
Asset management / Activity ratios
Total assets turnover ratio	Net Sales / totat assets	1.65	1.62
Fixed assets turnover ratio	Net Sales / net fixed assets	19.38	20.19
Days sales outstanding (DSO)	Receivables / (annual net sales/365)	70.7	72.37
Inventory turnover	(COGS) / Inventories	3.32	3.73
Average sales per day	Annual net sales / 365	77.79	73.3
Debt management / Leverage ratios
Debt to assets ratio	Total debt / Total assets	0.31	0.26
Liabilities to assets ratio	Total liabilities / total assets	0.48	0.46
Debt to equity ratio	Total debt / Total common equity	0.6	0.48
Times-interest-earned (TIE) ratio	EBIT / Interest expense (not reported_)	NA	NA
Average purchase per day	COGS / 365	48.9	50.37
Days payable	Accounts payable / (COGS / 365)	49.89	52.81
Profitability ratios
Profit margin	Net income / Net sales	0.03	0
Operating profit	EBIT/Net Sales	0.05	-0.05
Basic earning power (BEP)	EBIT/ Total assets	0.09	-0.09
ROA	Net income / total assets	0.05	0
ROE	Net income / common equity	0.1	0

Answer 1

We will take the average values for our analysis as we have three year data available for Designer and Two year data available for Walcott.

Liquidity Ratio Analysis

Company	Current ratio	Quick ratio
Designer	2.46	1.14
Walcott	1.42	0.78

Liquidity ratio indicates company's ability to meet its short term debt obligations. In general liquidity would imply how easily the current asset would be made available to honot its short term obligations particulary receivables. In quick ratio we omit inventory from the calculation so as get more clarity on the firm's liquidity status. As we can see both current ratio and quick ratio is greater for Designer, we can conclude that Designer has an edge over walcott when it comes to meeting its short term obligation.

Solvancy Ratio Analysis

Company	Debt to Equity Ratio	Debt to Aset Ratio
Designer	5.65	0.6567
Walcott	0.54	0.2850

Solvancy ratios would incidate how a firm is placed wrt to the long term obligation. Debt to Equity ratio would usually indicate the level of leverage in the firm ie how much the business is funded by investors and how much debt has been taken by the firm. Since more debt implies more debt servicing or interest payment, it is costlier form of financing. Usually D/E ratio would depend on the sector, but considering the limited amount of information in the question, Walcott has a better position with optimum textbook leverage. A lower debt to equity ratio is always preferable. Debt to asset ratio would indicate how much debt has been been used to finance company,s own asset. Designer debt to asset ratio of 66% indicate that 66% of the asset has been financed by creditors and rest by the business owners. Similarly debt to asset ratio of 28.5% for walcott indicates that almost 71.5% of te asset has been fnanced by the owners.

Asset Management ratio analysis

Company	Total Asset turnover	Fixed asset turnover
Designer	1.77	7.96
Walcott	1.6350	19.78

Asset turnover ratios would imply how effectivly the assets are utilised to generate revenue. Though total asset turnover is almost same for both the firms, the fixed assets are more efficiently being utilised by Walcott.

Profitability ratio analysis

Company	Profit margin	operating profit margin	ROA	ROE
Designer	0.0133	0.033	0.03	0.1867
WALCOTT	0.015	0	0.0250	0.05

Profit margin and operating margin would indicate the overall effectiveness of the process ie how efficiently the comapany converts its sale to final income or profit. Based on the above numbers though profit margins is almost similar for both the firms. the operating profit margin is 0 or walcott which is a matter of concern.

Return on assets indicates the efficiency of the management to use its assets to generate suitable return. Return on equity would indicate management's ability use to stakeholders money. It is synomous to profit, efficiency and growth. Designer has a higher Roe indicating managements efficiency towards utilisation of funds.

As per latest numbers neither of the company is suitably posted owing to the non positive ROE,ROA and profit margins.