Financial ratio data is listed below for Gallery of Dreams. Select the answers t

Question

Financial ratio data is listed below for Gallery of Dreams. Select the answers that are strengths for the firm after analyzing the ratios. Gallery of Dreams Ratios Ratio Industry2015 2014 2013 2.50x 4.48x 4.06x3.48x 0.80x 1.47x 1.18 0.96x 9 days 2.30x 1.19x 1.24 1.37x 15 days 11 days 12 days 8 days Current Quick 11 days 16 days 15 days Average collection period Inventory turnover Days payable outstanding Fixed asset turnover Total asset turnover Debt ratio 17.50x 9.74x 9.09x8.85x 2.80x 1.50x1.67x1.82x 62.00% 29.47% 34.04% 39.17% Long term debt to 25.53% 14.09% 18.91% 22.33% 9.93x 22.02x 19.00x 14.23x 8.69x 4.59x4.47x 4.25X 31.10% 59.21% 59.39% 58.52% 20.52% total capitalization Times interest earned Fixed charge coverage Gross profit margin Operating profit margin Net profit margin Return on investment Return on equity 8.06% 22.05% 21.86% 4.32% 9.21% 11.34% 11.89% 17.97% 24.14% 11.00% 18.28% 27.51% 10.97% 18.35% 29.88% Profitability is excellent with gross, operating and net profit margins above industry average and increasing all years with the exception of gross profit margin which decreased slightly in 2015 Interest is covered by profits as are lease payments and the numbr of tims oormed hm inmmed Nnh mr (Points : 12) Accounts payable are paid in a timely maner Inventory turnoverbelow industry average and ls extremely be, indeating meerm does not move inventory wel The average collection period is increasing and is now above industry average Curront and quick ratios are above industry average and increasing

Explanation / Answer

Profitability is excellent as gross profit margin of 59.21% is more than industry standard of 31.10%. Similarly, operating profit margin and net profit margin are higher than industry.

Firm's long term debt to total capitalization is also low as compared to industry (14.09% vs 25.53%). Times interest earned by the firm is also higher (22.02x) as compared to industry (9.93x).

Accounts payable are paid much before the industry standard of 15 days by 11 days. This is also a strength of the firm.

Inventory turnover of the firm is lower than industry and signifies overstocking, obsolescence, or deficiencies in the product line or marketing effort. This is not a strength for the firm.

Over the years, average collection period of firm has increased from 9 days to 16 days and is more than the industry average of 11 days. This means that the firm is taking longer to collect payments and the credit terms are too lenient. This is also not a strength for the firm.

Both current and quick ratio of the frim is above the industry average and has been increasing over the years. Current and quick ratio over 1 signifies that the firm has enough assets to meet its immediate liquidity needs. Since for the firm, this ratio is more than 1, it is a strength for the firm.

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