5. Using the financial ratios calculated from the 2015 annual report of PVC Pipe
ID: 2798543 • Letter: 5
Question
5. Using the financial ratios calculated from the 2015 annual report of PVC Pipes, assess the short-term liquidity, operating efficiency, capital structure and long-term solvency and profitability of the firm. 8 Ratio 2015 Current .48x 0.98x 58 days 28 days 47 days Quick Average collection period Days inventory held Days payable outstanding 61 days Cash conversion cycle Fixed asset turnover Total asset turnover Debt ratio Long Term debt to 1.70x 671 0% 1.43x 63.08% total capitalization Times interest earned Fixed charge coverage Cash flow adequacy Gross profit margin Operating profit margin Net profit margin Cash flow margin Return on investment Return on equity Cash return on assets 42.51% 1.65x 1.40x 46.82% (5.10x) (2.34x) 10.10% (5.93%) (4.98%) 3.84% (863%) (25.49%) 6.90% 12.81% 2.75% 0.91% 1.28% 9·10%Explanation / Answer
By looking at the Current and Quick Ratios, it is observed that liquidity management of the company much better than previous year. It has improvised its liquidity management from 2014 to 2015. Presently, company can be able to meet any immediate liquidity requirements without much problem.
In terms of Average Collection Period, Days Inventory Held and Days Payable Outstanding, the company is lagging behind in these areas. It needs to improve on working capital management and net operating cycle. Company is paying early to its suppliers (61 days) but collecting more (65 days) which will lead to problem in working capital management of the company if not looked up on it soon.
In terms of solvency ratios like Fixed Asset TO, Total Asset TO, Debt Ratio or LT Debt to Total Capitalization, company has increased its leverage and able to finance its investment with debt than 2014. Company now able to utilize its assets in a proper way and maximizing the benefits.
Regarding the profitability ratios, company isn't doing as it indicates that due to high debt burden on company, it is unable to generate more operating income than 2014 due to its interest and tax burdens are more now. In order to grow company it must have invested through debt by increasing it.
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