Question

You have been hired as an analyst for Bank WA and your team is working on an independent assessment of Duck Food Inc. (DF Inc.). DF Inc. is a firm that specializes in the production of freshly imported farm products from New Zealand.  Your assistant has provided you with the following data about the company and its industry.

Ratio	2018	2017	2016	2018- Industry Average
Long-term debt	0.45	0.40	0.35	0.35
Inventory Turnover	62.65	42.42	32.25	53.25
Depreciation/Total Assets	0.25	0.014	0.018	0.015
Days’ sales in receivables	113	98	94	130.25
Debt to Equity	0.75	0.85	0.90	0.88
Profit Margin	0.082	0.07	0.06	0.12
Total Asset Turnover	0.54	0.65	0.70	0.40
Quick Ratio	1.028	1.03	1.029	1.031
Current Ratio	1.33	1.21	1.15	1.25
Interest coverage Ratio	0.9	4.375	4.45	4.65

1. What can you say about the firm's overall management in terms of the following?

(Be as complete as possible given the above information, but do not use any irrelevant information).

1. Liquidity                                                                                                      [2 marks]
2. Efficiency (operational efficiency)                                                                 [2 marks]
3. Performance (profitability, margins)                                                               [2 marks]
4. Leverage                                                                                                    [2 marks]

2. If current liabilities of the company was 2.75 million in 2018 and daily cash expenditure was 0.013million, using the data provided in the table, calculate the defensive interval ratio.           

[2 marks]

Answer 1

a)

i. Liquidity:

It will be the current ratio and quick ratio are used to find liquidity of the company. In the year 2018 the the current ratio of 1.33 is higher than the industry average of 1.25, replicates the company's ability to deal with its current liabilities. Also the quick ratio was seen lower than the industry average and indicates that the company is having considerable amount of inventory in its current assets.

ii. Efficiency (operational efficiency):

It is measured by inventory turnover, total asset turnover and days sales in receivables. As the inventory was moving faster for the company inventory turnover has been on the increasing trend. Also it is able to generate more sales per dollar of assets and therefore total asset turnover is on higher side. The company has efficient receivables management system where days sales in receivables is lower than the industry average which results in low level of outstanding accounts receivables.

iii. Performance (profitability, margins):

profit margin ratio will be used to performance and the company has profit margin of 0.082 which is lower than industry average of 0.12 which shows that it was earning low profits while compared with industry.

iv. Leverage:

Many ratios are used to find leverages like debt to equity ratio, interest coverage ratio, long term debt ratio. Debt to equity ratio is lower while comparing with industry average and shows that as a percentage of equity the company has lower debt. Interest coverage ratio will be termed as EBIT/interest expenses where it has 0.9 in 2018 when comparing with the industry average of 4.65 abd shows that the company is able to service its debt easily. Long term debt ratio seems higher for the company than the industry average and indicates it is making use of higher long term debts.

b) Current ratio:

= current assets/current liabilities

For the year 2018: 1.33 = Current assets/2.75 million

Or current assets = 3.6575 million

Defensive interval ratio:

=current assets/daily cash expenses

=3.6575 million/0.013 million

= 281.35