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Question: Problem 1 Financial ratio data is listed below for Crazy A's Horse Trailers. Construct a list of ...
Problem 1
Financial ratio data is listed below for Crazy A's Horse Trailers. Construct a list of strengths and weaknesses for the firm after analyzing the ratios.
Crazy A's Horse Trailers
Ratios
Ratio
Industry
2016
2015
2014
Current
1.20x
1.18x
1.20x
1.35x
Quick
0.20x
0.18x
0.21x
0.26x
Average Collection Period
4 days
9 days
8 days
6 days
Days Inventory Held
75 days
106 days
99 days
90 days
Fixed Asset Turnover
11.30x
8.84x
8.89x
8.95x
Total Asset Turnover
2.50x
2.20x
2.27x
2.42x
Debt to Equity
3.50x
3.65x
3.17x
2.35x
Times Interest Earned
2.40x
1.72x
2.00x
2.23x
Gross Profit Margin
23.10%
21.21%
22.39%
23.52%
Operating Profit Margin
2.00%
3.05%
2.86%
2.52%
Net Profit Margin
1.10%
0.89%
1.00%
0.97%
Return on Investment
2.75%
1.97%
2.28%
2.35%
Crazy A's Horse Trailers
Ratios
Ratio
Industry
2016
2015
2014
Current
1.20x
1.18x
1.20x
1.35x
Quick
0.20x
0.18x
0.21x
0.26x
Average Collection Period
4 days
9 days
8 days
6 days
Days Inventory Held
75 days
106 days
99 days
90 days
Fixed Asset Turnover
11.30x
8.84x
8.89x
8.95x
Total Asset Turnover
2.50x
2.20x
2.27x
2.42x
Debt to Equity
3.50x
3.65x
3.17x
2.35x
Times Interest Earned
2.40x
1.72x
2.00x
2.23x
Gross Profit Margin
23.10%
21.21%
22.39%
23.52%
Operating Profit Margin
2.00%
3.05%
2.86%
2.52%
Net Profit Margin
1.10%
0.89%
1.00%
0.97%
Return on Investment
2.75%
1.97%
2.28%
2.35%
Explanation / Answer
Analysis Ratio Industry 2016 2015 2014 Strengths Weaknesses Current 1.20x 1.18x 1.20x 1.35x This is good and the company started to eliminate the amount blocking in the current assets. From Year 2014 to 2016, the ratio is very good in optimisation of utilisation of its current assets and current liabilities and almost reached the industry standards. Quick 0.20x 0.18x 0.21x 0.26x This is also good and almost equalling to the industry standards. However gone below the industry standards is not a good sign and need to review why the ratio is deteriorating from 2014 on wards. Average Collection Period 4 days 9 days 8 days 6 days This is not good and it shows that the company is not able to collect its receivables as per the standards and the collection department need to be strengthened. Also to be noted that the ratio is very bad from 2014 onwards and it is worsening year by year. Days Inventory Held 75 days 106 days 99 days 90 days This is not good and it shows that the company is not able to convert the inve ntory to billing as per the standards and the production department need to be strengthened. Also to be noted that the ratio is very bad from 2014 onwards and it is worsening year by year. Fixed Asset Turnover 11.30x 8.84x 8.89x 8.95x This clearly shows that the company is not utilising its fixed assets and the fixed assets are becoming idle and not helping the company to increase the revenues. Hence the asset management to be critically reviewed as the ratio is not at all meeting the industry standards since 2014. Total Asset Turnover 2.50x 2.20x 2.27x 2.42x This also not favourable as the ratio was almost reached the industry standards in 2014 and afterwards it is worsening. Debt to Equity 3.50x 3.65x 3.17x 2.35x Debt is getting increased year by year in comparison to the equity and not good. It shows that the debt level is more to its operational requirement. Times Interest Earned 2.40x 1.72x 2.00x 2.23x As commented in debt equity, it is evident here that the company's serviceability of interest is getting lower by year by year and it shows that the operational income is not up to the optimum level for the debt acquired. Gross Profit Margin 23.10% 21.21% 22.39% 23.52% Company is not upto its potential as its margins are diminishing from 2014 onwards. Operating Profit Margin 2.00% 3.05% 2.86% 2.52% This ratio is good and this is more and gross profit is lower is clearly showing that the interest burden is more for the company. That is why even the operating profit margin is more the gross profit and net profit margins are lower. Net Profit Margin 1.10% 0.89% 1.00% 0.97% As stated above the ratio is not as per the industry standards and it is mainly because of huge debt and its interest burden. Return on Investment 2.75% 1.97% 2.28% 2.35% Obviously as stated in the above all comments, the return on investment is not good. By analysing the above all ratios, it is clear that the company has borrowed huge funds without looking in to their operational and capital requirements and the borrowed money is unnecessarily invested in fixed assets, due to poor collection from the bills raised and also the company is not in a position to bill the inventory because of lower production lelvels.
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