4. Financial ratio data is listed below for Gallery of Dreams. Construct a list
ID: 2798546 • Letter: 4
Question
4. Financial ratio data is listed below for Gallery of Dreams. Construct a list of strengths and weaknesses for the firm after analyzing the ratios. Gallery of Dreams Ratios Industry 2015 2014 2013 Ratio 4.48x 1.47x 4.06x 1.18x 3.48x 0.96x 9 days 2.50x 0.80x 11 days 2.30x 15 days 17.50x 2.80x 62.00% Current Quick Average collection period Inventory turnover Days payable outstanding Fixed asset turnover Total asset turnover Debt ratio Long term debt to total capitalization 16 days 15 days 1.24x 12 days 9.09x 1.37x 8 days 1.19x 11 days 9.74x 1.50x 29.47% 8.85x 1.82x 39.1 7% 1.67x 34.04% 22.33% 14.23x 18.91% 14.09% 22.02x 25.53% 9.93x 8.69x 31.10% 8.06% 4.32% 9.21% 11.34% 19.00x Times interest earned Fixed charge coverage Gross profit margin Operating profit margin Net profit margin Return on investment Return on equity 4.59x 59.21% 22.05% 11.89% 17.97% 24.14% 4.47x 59.39% 2 1.86% I 1.00% 18.28% 27.51% 4.25x 58.52% 20.52% 10.97% 18.35% 29.88%Explanation / Answer
By looking at the Current and Quick Ratios, it is observed that liquidity management of the company much better than industry standards. It has improvised its liquidity management from 2013 to 2015. Presently, company can be able to meet any immediate liquidity requirements without much problem.
In terms of Average Collection Period, Inventory Turnover and Days Payable Outstanding, the company is lagging behind the industry standards. It needs to improve on working capital management and net operating cycle and bring as close as industry standards or better than that.
In terms of solvency ratios like Fixed Asset TO, Total Asset TO, Debt Ratio or LT Debt to Total Capitalization, company unable to meet industry standards, this could be due to improper asset liability management. Company unable to utlize its assets in a proper way and maximizing the benefits. It needs an attention.
Regarding the profitability ratios, company is doing far between than industry standards, that indicates that due to low debt burden on company, it can generate more operating income than its competitors as the interest and tax burdens are less. In order to grow company must invest or expands its business through debt by increasing up to industry standards or through equity by retained earnings more rather than paying dividends.
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