4. Financial ratio data is listed below for Gallery of Dreams. Construct a list

Question

4. Financial ratio data is listed below for Gallery of Dreams. Construct a list of strengths and weaknesses for firm after analyzing the ratios. Gallery of Dreams Ratios Ratio 2015 2014 2013 3.48x 0.96x 4.06x 4.48x 1.47x 16 days 2.50x 0.80x 11 days 2.30x 15 days 17.50x 2.80x 62.00% Current 1.18x 1.24x 9.09x Quick 15 days A verage collection period Inventory turnover Days payable outstanding Fixed asset turnover 1.37x s days 8.85x 1.82x 39.1 7% 9.74x 1.50x 29.47% Total asset turnover 1.67x Debt ratio 34.04% Long term debt to total capitalization Times interest earned Fixed charge coverage 22.33% 18.91% 19.00x 4.47x 59.39% 21.86% 14.09% 22.02x 25.53% 14.23x 8.69x 31.10% 8.06% 432% 9.21% 11.34% 59.21% 22.05% 11.89% 17.97% 24.14% 4.25x 58.52% 20.52% 10.97% 18.35% 29.88% Gross profit margin Operating profit margin Net profit margin Return on investment 18.28% 27.51% Return on equity

Explanation / Answer

1. Current ratio isd better than industry average. Hence current assets are much higher than current laibiloities, meaning there is more room for further leverage if required.

2. Quick ratio is better than industry average but there is huge difference in Quick and current ratio which shows higher stock of inventory. Company should see to reduce inventory and convert it into sales.

3. Average collection period is higher hence credit conversion rate is poor.

4. Inventory turnover ratio is low. Hence taking que from answer 2 , company should reduce inventory and convert it into sales. Inventory management should be done in better way by reducing raw material purchase and increasing the inventory turnover ratio

5. Days payable outstanding is very less and from answer 3 credit recovery is poor. Which means cash inflow is slower than cash outflow which can create liquidity problem.

6. Fixed asset turnover ratio is very bless meaning asset utilization is poor or fixed asset are kept idle for a time.

7. Total asset turnover ratio is also less implying mismanagement of asset utilization.

8. Debt ratio is very low than industry standards, which shows room for further leverage if required.

9. Long term debt to capitalization ratio is less supporting increase in leverage

10. &11. Times interest earned is higher, while Fixed charge coverage is lesser than industry standards which means company is in good position for increasing loan or capital if required. Company will get loan at cheaper rate as risk is less

12., 13 and 14 All profit margins are much better than industry standards indicating that the company is able to achieve higher profits than their costs. And customers are ready to pay more premium for their products

15 and 16 Return on equity as well investment are much higher than industry standards which shows company is able to generate higher profits for their stakeholders.

Note: This company might be selling its products at very higher rates, hence its sales figures must be lesser due to which Inventory and asset turnover ratios are low and margins are high. One should focus to increase sales.

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