Question

1) What are the firm’s major strengths and weaknesses? Explain briefly.

	Year 2	Year 1	Year 0	Industry
Current Ratio	1,86x	1,1x	2,3x	2,7x
Quick Ratio	0,67x	0,4x	0,8x	1,0x
Inventory turnover	4,10x	4,5x	4,8x	6,1x
DSO	44,9	39	36,8	32
Fixed asset turnover	8,61	6.2x	10.0x	7.0x
Total asset turnover	2,01	2.0x	2.3x	2.5x
Debt ratio	55,61%	95,40%	54,80%	40,00%
TIE	6,3x	-3.9x	3,3x	6,2x
EBITDA coverage	5,5x	-2,5x	2,6x	8,0x
Profit margin	3,60%	-8,9%	2,60%	3,60%
Basic earning power	14,40%	-24,1%	14,20%	17,80%
ROA	7,25%	-18.1%	6,00%	9,00%
ROE	16,34%	-391,4%	13,30%	18,00%
Price/Earnings	12,01x	-0,4%	9,7x	14,2x
Price/Cash Flow	8,2x	0,6x	8,0x	7,6x
Market / Book	1,96x	1,7x	1,3x	2,9x
Book value per share	$6,21	$1,33	$6,64	N/A

Answer 1

Strengths

1. Fixes asset turnover: This has been higher in 3 years and better than the industry which means that the company is using its assets efficiently to generate sales.
2. Profit margin is the same as industry hence the company is performing as per industry average.
3. ROE and ROA: The company is generating a good per cent of its Return on Equity and Return on assets but is lower than Industry. The company has taken necessary action of year 1 lo
4. High P/E: Investors are expecting good returns from this company.
5. The book value of the share is increased from year 1 to year 2 hence the value of the shares is increasing the market value of shares is increasing.
6. Times interest charge says the company's ability to pay its obligation. In case of this, its ability is increased from year 1 and is as per the industry average
7. The basic earning power average is actually Ebit divided by the assets and is up to the mark.
8. The market to book values is the market value of each share divided by the net assets value available to each shareholder. A value more than one states than the stock is overvalued and less than 1 means that share is undervalued, but is less than industry average.

Weaknesses:

1. Inventory Turnover: The industry is taking 6.10 times to convert its inventory into cash whereas the company is taking 4.10 so the company is taking more time to convert its inventory into cash.
2. Current ratio: The company's current ratio is increased for year 1 hence it's better there is more liquidity. But it's lower than the industry average
3. Quick ratio only takes cash and liquid assets which is increased from year 1 but us again lower than year 0 and industry.
4. DSO: A high DSO means the company is taking longer to collect money from its receivables, in case this company it's high hence the company is taking longer to collect money from the debtors.
5. Price to cash flow: It divides the market value of the share with the cash inflow it is higher which means the market value is overvalued. It is also more than the industry average.