Ratio 2010 2009 2008 2010 Industry Average Long-term debt 0.45 0.40 0.35 0.35 In
ID: 2480284 • Letter: R
Question
Ratio
2010
2009
2008
2010
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
0.075
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
Times interest earned
0.9
4.375
4.45
4.65
Equity multiplier
1.75
1.85
1.90
1.88
Referring to the given data, the CEO of WQY Inc. wrote, "2008 was a good year for the firm with respect to our ability to meet our short-term obligations. We had higher liquidity largely due to an increase in highly liquid current assets (cash, account receivables, and short-term marketable securities)."
Do you think the CEO is correct in making this statement? Explain your stand and use only the given data for your analysis.
Ratio
2010
2009
2008
2010
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
0.075
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
Times interest earned
0.9
4.375
4.45
4.65
Equity multiplier
1.75
1.85
1.90
1.88
Explanation / Answer
Ans: CEO is absolutely right in stating that in 2008 the firm was in good position as long as liquidity is concerned. This can be justified by the fact that quick ratio of the firm was greater than any other period after 2008. It almost in sync with industry average.
The quick ratio implies a firm can really pay its current liabilities really quick let's day with in a period of 3 months. The major part in quick ratio is of the cash. And here we can clearly analyse that company had the better cash position in 2008. Because firm inventory turnover ratio was lessor than any of the periods given here as well as firm's receivables are also quciker. That all says that company gets it money qucikly.
Inventory turnover ratio tells us that how qucikly inventory is being sold. When you sell your inventory quciker, you will get the cash quicker at the same time you dont have to incurr an extra carrying cost of inventory.
These all are summing to the cash leading to an increase in cash. At the same time Days sales in receivables tells us that how qucikly we receive the cash from the debtors on credit sales. So this ratio is also the least among all years.
Hence, Firm is getting the money quciker and kepping the money in hand will definately fetch you some interest at the same time you can save the interest that you would like to pay on overdrafts to meet your short term cash shortage.
Another way on looking it is that depreciation on total assets is higher than the industry avg and 2009. Since dep is a non cash item, It is infact helping the firm in increasing the cash by reducing the net profit hence company has to pay lessor tax.
Interest earned is also highest in this year, that means that company is generating enough funds to meet the debt obligation. That is again a sign of good liquidity of the firm.
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