Question

Amsterdam, a young business analyst was tasked to research on the business standings of 4 companies. Written below are the results of his research.

	A	B	C	D
Current Ratio	0.25	10.50	6.00	14.00
Receivable Turn-over	4x	6x	2x	12x
Return on Asset	1.25	4.50	2.50	4
Inventory turn-over	12x	4x	Once	6x
Quick ratio	0.15	1.90	5.50	10
Average Collection period	30 days	40 days	180 days	300 days

Given the results, identify the problems of each company based on the computed financial ratios. Discuss your answer.

Answer 1

Company A – Here the current ratio figure is 0.25 and this is less than 1. This means that the company has more current liabilities than current assets and hence is facing problems with regards to meeting its short term obligations. This company has a low return on assets. This could possibly due to the company having a large asset base. It could also be because of lower profitability levels of the company.

Company B – Here the inventory turnover is low. This shows lower degree of efficiency with regards to inventory management in the company. A low inventory turnover can mean that the company is not able to turn over its inventory into sales in the desired manner.

Company C – There are two problems here. The first is the low inventory turnover which is only once. This shows that the company is highly inefficient when it comes to turning its inventory. Secondly the company’s average collection period is high at 180 days. It means the company takes around 6 months to collect its receivables and this can create working capital problems for the company.

Company D – Here the average collection period is very high and hence not at all desirable. It stands at 300 days. This translates to a figure of 10 months. This is a very high figure and highly undesirable.