Question

You are the financial analyst at SewMart, an arts and crafts retail store. Your boss has asked you to review the company's financial results for the past three years and to provide an analysis of your findings:

SewMart Ratios	20x9	20x8	20x7
Sales trend	16.7	22.1	25.1
Current ratio	0.78	1.90	2.20
Acid-test ratio	0.40	1.32	1.90
Accounts receivable turnover	41.29	33.20	10.60
Inventory turnover	3.58	6.25	7.80

1. Has your company performed worse, better, or about the same?

2. Should you be concerned about any ratio noted in your analysis?

3. What recommendations would you share with your boss on the financial health of the company?

Prepare a brief memo summarizing how your company is performing and recommendations. Use the questions as a guide.

Answer 1

1. The company performance has worsened from the last year, Sales Trend, Current ratio, Acid ratio all are declining.

2. The Sales Trend is declined from 22.1 in Year 20x8 to 16.7 in Year 20x9. It shows that our products are not pleasing the customers and we need to improve our product quality. There could be another possibility that products are overpriced, we should reduce the price if this is the case.

Current Ratio is also declining from 1.90 in Year 20x8 to 0.78 in Year 20x9. It shows that the company's current liabilities are more than current assets and in future company will be in trouble to repay the current liabilities. They may have to use assets other than current assets which can cause liquidity issues.

Lower Inventory Turnover ratio is also an concern area as it shows that inventory is not selling quickly like the previous year. It shows that there is decline in the demand of the product.

3. The top level management must consider current situation of the company as an area of concern and should analyse that why the sales are declining, they may consider to bring more creative arts and they have to consider that either there is change in the taste of customer's choice. They should focus on increasing the sales as this will bring more cash flow to the company which will help in improving the current ratio, acid ratio, inventory turnover ratio and sales trend. Through this company also earn more profits as of now.

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