Suppose you are conducting an analysis of the financial performance of Cute Came

Question

Suppose you are conducting an analysis of the financial performance of Cute Camel Woodcraft Company over the past three years. The company did not issue new shares during these three years, and has faced some operational difficulties. The company has thus pilot tested some new forecasting strategies for better operations management. You have collected the company's relevant financial data, made reasonable assumptions based on the information available, and calculated the following ratios. Ratios Calculated Year 1 Year 2 Year 3 Price to cash flow 7.00 9.10 10.19 Inventory turnover 14.00 16.80 18.82 0.30 0.32 0.38 Debt to equity Based on the preceding information, your calculations, and your assumptions, which of the following statements can be included in your analysis report? Check all that apply A plausible reason why Cute Camel Woodcraft Company's price-to-cash-flow ratio has increased is that investors expect higher cash flow per share in the future The company's creditworthiness has improved over these three years as evidenced by the increase in its debt-to-equity ratio over time. Cute Camel Woodcraft Company's ability to meet its debt obligations has worsened since its debt-to-equity ratio increased from 0.30 to 0.38. An improvement in the inventory turnover ratio could likely be explained by the new sales-forecasting strategies that led to better inventory management

Explanation / Answer

First statement : This statement can be included. The company's operations are having some difficulties and an increase price-to-cash flow ratio denotes that investors expect higher future cash flows.

Fourth statement : This statement can also be included. Inventory turnover ratio has in fact improved.

Second and third statements should not be included as debt-equity ratio neither indicates a company's ability to meet its debt obligations nor does it show whether its credit worthiness has improved. It is simple showing the amount of debt in the capital structure in comparison to equity. It is used to compute the company's financial leverage.

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