Analytical procedures Case Solution
In ratio analysis, there arevariousratios that company uses to measure its performance. Following are the list that use to measure the company performance.
- Liquidity Ratio
- Solvency Ratio
- Profitability Ratio
- Management Efficiency Ratio
- Leverage Ratio
In the following that is used to measure the company performance. Let’s discuss the liquidity ratio first.
Liquidity ratio indicates the measurementof the company’s ability to pay its short-term obligations. The company uses this ratio for measuring their performance.The net working capital has been increasing by approximately 18%, year over year based on the prior year presented. As we expect that the same would increase in their operation efficiency but the company growth is declining and the decrease in current ratio appear to result from lower their effectiveness in the operations as compare to the previous years.
The company also experiences adecline in quick ratio, of nearly 29%, which indicates that the company does not manage their operations efficiently and cannot be able to pay its short-term obligations whenever they arise. Acid-test ratio provides the better picture for the investor’s perspective. The decrease in the liquidity attraction towards the investor for the company market position.
The debt account of the company has increased by approximately 40% in the current year. Furthermore, at the same time, they earned around 20% on their investment, but they are still losing their market share. They do not make their investments in a highly risky manner. In 2009, they had an excessive cash in their cash flow, by the year end they had been decreasing in cash by approximately 33%, year over year, based on the prior year presented. The company currently appears to end up in accounts receivables compared to theprevious year in which they experienced anincrease of around 220%. If there is constant growth in the receivables, there is ahigh possibility that company might face bad debts and management might hide their losses by falseaccounting entries in the audit report.
The increasing ofthe receivables account has threatened the company position in the market.The company cannot make payment to their vendors; theycan't give salaries to their employees. So itis imperative for the company to shorten the time of receivables to sustain its operations more smoothly. In this scenario, company days of sales outstanding have been increasing approximately 23 days in the current year before the previous year. This indicates that the company emphasizes on thecollectible rather than on particulars. In 2010, thecompany had to increase 209% in the receivables, indicating that company, in future times, and could face bad debts in their receivables.
Questions: what is the primary explanation for anincrease in the receivables in the current year? What is the cause to increase in the receivables? What were 2009 receivables compare to 2010 receivables?
In the solvency ratio, the debt account of the company has been increasing by approximately 40% year over year based prior year presented. The company debt indicates that they are more rely on the external financing instead of generating the revenue from their operations. The company interest coverage ratio is 82 times, which measures the ability of the company to meet its interest payment over the debt (loans).
The company’s sales are also increasing compared to the previous year. Currently, the company sales are 4%, which is greater than the prior year sales, which wasabout 1%. But the debt over the asset is about 27%, which indicates the high liquidity of the company. The debt financing over the equity is about 45%, which indicates the company only have 55% equity to operate their business. That is adverse to the company, which company does not play at its potential level.
Also, the companyinventory turnover is about 9, which represent the period for sold inventoryper year. The company inventory turnover is less than the prior year. There is a decrease in the number of times the company sold out its inventory but at the same time they cannot manage the company operation as well, and the increase indebt level of the current yearis not agood indicator for the companyperspective.
Furthermore, they are increasing return on equity on the operations performed in the company but the receivable turnover takes time for the company to move further to achieve thedesired outcome. This mightbe a risk for the company to run the business more smoothly than they did in the previous year. The management would have to answerfor the debt level and equity over the debt level.
Questions: what are the hurdles that company focus on to take the loans? What are the problems that company needs for taking the debt? What are the factors that companyissteadily declining?........................................
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