Question

1. 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

Answer -

1. - Liquidity can be analysed by using Qucik and current ratio

Explanation: Quick ratio is in line with industry average for 2018 and current ratio is better than industry average in 2018. However, company improved its current ratio over the last 3 years.

2. Efficiency can be analysed by Total asset turnover, Inventory Turnover, Days’ sales in receivables

Explanation:

Total asset turnover is better than industry level in 2018 (higher the better). However, ratio is coming down over the last 3 years. Company efficicency is degrading

Inventory turnover is deteriorating over the last three years and much higher the industry average in 2018 (Lower the better) , Company efficicency is degrading

Day's sales in receivable is better than industry in 2018. However, days are increasing over the last three years (lower the better). Overall, company is prforming good in comparision to industry

Performance ratios: Profitabiltiy can be analysed by profit margin

Explanation:

Profit margin ratio is much below the industry ratio in 2018. Howver, company is improving in last three years. company management should match the industry levels.

Leverage ratio's: Levarege can be analysed by Long-term debt , Debt to Equity, Interest coverage ratio:

Explanation:

Company's debt is increasing over the three years and above the industry average measured by long term debt ratio. It means company is acquiring more debts to fund their operations. Company should lower the debt

Debt to equity: Ratio is better than the industry and decreasing over the last three years which is better for the company

Interest coverage ratio: This is ratio is deterorating from the last three years and much below the industry average. Management should improve the EBIT or reduce the interest payments to improve the ratio.

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