Question

answer the following questions and use the financial statement ratios to support your answers where appropriate:

Do you feel that the company is able to meet its current and long term obligations as they become due?

Comment on the profitability of the company with respect to the various profitability ratios that you computed.

Would you lend money to this company for the long term?

Comment on the ability of the company to collect its receivables and mange inventory.

Ratios before
	2014	2015	2016	Industry Average
Liquidity
Current	2.39	2.68	2.90	3.12
Quick	1.10	1.16	1.21	1.56
Working Capital	$    98,750.00	$ 100,450.00	$ 103,000.00	$           110,000.00
Leverage
Debt to Total Assets (%)	20.97%	21.98%	22.89%	20.89%
Times Interest Earned	8.75	9.12	9.56	10.22
Activity
Inventory Turnover (sales)	8.21	9.91	10.12	10.52
Fixed Asset Turnover	3.43	3.51	3.59	3.64
Total Asset Turnover	2.15	2.20	2.25	2.56
Average Collection Period (days)	14.95	14.69	14.42	14.28
Accounts Receivable Turnover	24.08	24.50	24.97	25.21
Days in Inventory	44.46	36.83	36.07	43.21
Profitability
Gross Profit Margin (%)	21.10%	22.50%	24.03%	24.56%
Net Profit (%)	6.89%	7.25%	7.89%	8.03%
Return on Total Assets (%)	15.50%	16.10%	16.24%	16.07%
Return on Equity (%)	20.15%	21.89%	22.15%	22.06%
Payout Ratio (%)	15.10%	15.84%	16.09%	16.86%

Ratios after calculated Ratios (answers are all rounded by 4 decimal places)

Current ratio = Current assets / Current liabilities

= 161000 / 59500 = 2.7059

?

Quick ratio = Cash + Accounts receivable / Current liabilities

= (34400+36600) / 59500 = 1.1933

?

Working capital = Current assets - Current liabilities

= 161000 - 59500 = 101500

?

Accounts receivable turnover = credit sales / average accounts receivable

= 881500 / (34750+36600) / 2 = 24.7092

?

Average collection period = 365 / Accounts receivable turnover

=365 / 24.71 = 14.7718

?

Inventory turnover = Cost of goods sold / Average inventory

= 693900 / (62400+90000) / 2 = 9.1063

?

Days in inventory = Number of days in the period / Inventory turnover

=365 / 9.11 = 40.0821

?

Debt to total assets ratio = Total liabilites / Total assets

= (59500+35000) / 418100 = 0.2260

?

Gross profit ratio = Gross profit / Sales

= 187600 / 881500 = 0.2128

?

Profit margin ratio = Profit / Sales

= 65800 / 881500 = 0.0746

?

Return on assets ratio = Net profit / Average total assets

= 65800 / (469225+418100) / 2 = 0.1490

?

Asset turn over ratio = Net sales / Average total assets

= 881500 / (469225+418100) / 2 = 1.9959

Answer 1

Do you feel that the company is able to meet its current and long term obligations as they become due?

Ans.1 )Yes the company is able to meet its current and long term obligations as they become due, which is shown by the current ratio and debt to asset ratio.

The current ratio is mainly used to give an idea of a company's ability to pay back its liabilities (debt and accounts payable) with its assets (cash, marketable securities, inventory, accounts receivable).

The higher the current ratio, the more capable the company is of paying its obligations, as it has a larger proportion of asset value relative to the value of its liabilities. However, a high ratio (over 3) does not necessarily indicate that a company is in a state of financial well-being either. Depending on how the company’s assets are allocated, a high current ratio may suggest that that company is not using its current assets efficiently, is not securing financing well, or is not managing its working capital well. To better assess whether or not these issues are present, a liquidity ratio more specific than the current ratio is needed.

Given company has a current ratio of 2.7 . which is good.

The debt to asset ratio is an indicator of firm’s long-term debt-paying ability.

The debt ratio shows how well creditors are protected in case of company’s insolvency by indicating the percentage of firm’s assets financed by creditors. From a pure risk perspective, lower ratios (0.4 or lower) are considered better debt ratios. Since the interest on a debt must be paid regardless of business profitability, too much debt may compromise the entire operation if cash flows dries up.
Given company has a debt to asset ratio of 0.2 which is good.

Comment on the profitability of the company with respect to the various profitability ratios that you computed.

Ans. The given company is profitable as shown by the profitablity ratio below:

Gross margin ratio is a profitability ratio that measures how profitable a company can sell its inventory. It only makes sense that higher ratios are more favorable. Higher ratios mean the company is selling their inventory at a higher profit percentage.

The ratio can be used to test the business condition by comparing it with past years’ ratio and with the ratio of other companies in the industry.

The given company shows a consistent improvement in gross profit ratio over the past years and is the indication of continuous improvement.

The profit margin ratio shows what percentage of sales are left over after all expenses are paid by the business.

An extremely low profit margin formula would indicate the expenses are too high and the management needs to budget and cut expenses.

This ratio also indirectly measures how well a company manages its expenses relative to its net sales. That is why companies strive to achieve higher ratios. They can do this by either generating more revenues why keeping expenses constant or keep revenues constant and lower expenses.

A higher gross profit margin indicates that a company can make a reasonable profit on sales, as long as it keeps overhead costs in control. Investors tend to pay more for a company with higher gross profit.

For the given company gross profit margin is high and improving each year and getting close to industry average

The return on assets ratio or ROA measures how efficiently a company can manage its assets to produce profits during a period.

The ROA figure gives investors an idea of how effective the company is in converting the money it invests into net income. The higher the ROA number, the better, because the company is earning more money on less investment.

For the given company return on asset is good and improving each year and is also bit higher than industry average in past 2 years.

Would you lend money to this company for the long term?

Ans. Yes, money can be lended to the company for long term since the company is having good financial ratio as per the industry standards. The key financial ratio in deciding it are debt/equity ratio,profit margin ratio, return on equity and current ratio.

Comment on the ability of the company to collect its receivables and mange inventory.

Ans 4.

Analyzing a company's inventories and receivables is a reliable means of helping to determine whether it is a good investment play or not. Companies stay efficient and competitive by keeping inventory levels down and speeding up collection of the moneys they're owed.

Efficiency ratios determine how productively a company manages its assets and liabilities to maximize profits. Shareholders look at efficiency ratios to assess how effectively their investments in the company are being used. Some of the most commonly considered efficiency ratios include

inventory turnover - A high ratio implies either strong sales and/or large discounts.

accounts receivable turnover - A high turnover ratio indicates a combination of a conservative credit policy and an aggressive collections department, as well as a number of high-quality customers. A low turnover ratio represents an opportunity to collect excessively old accounts receivable that are unnecessarily tying up working capital

the cash conversion cycle (CCC) - Generally, short cash conversion cycle is better because it tells that the company’s management is selling inventories and recovering cash from those sales as quickly as possible while at the same time paying the suppliers as late as possible.