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Author Question: Financial ratio data is listed below for Gallery of Dreams. Construct a list of strengths and ... (Read 83 times)

Charlie

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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
 
  Ratio Industry 2015 2014 2013
 
  Current 2.50x 4.48x 4.06x 3.48x
  Quick 0.80x 1.47x 1.18x 0.96x
  Average collection period 11 days 16 days 15 days 9 days
  Inventory turnover 2.30x 1.19x 1.24x 1.37x
  Days payable outstanding 15 days 11 days 12 days 8 days
  Fixed asset turnover 17.50x 9.74x 9.09x 8.85x
  Total asset turnover 2.80x 1.50x 1.67x 1.82x
  Debt ratio 62.00 29.47 34.04 39.17
  Long term debt to
   total capitalization
  25.53
  14.09
  18.91
  22.33
  Times interest earned 9.93x 22.02x 19.00x 14.23x
  Fixed charge coverage 8.69x 4.59x 4.47x 4.25x
  Gross profit margin 31.10 59.21 59.39 58.52
  Operating profit margin 8.06 22.05 21.86 20.52
  Net profit margin 4.32 11.89 11.00 10.97
  Return on investment 9.21 17.97 18.28 18.35
  Return on equity 11.34 24.14 27.51 29.88
 
 
 
 
 What will be an ideal response?

Question 2

Customers' individual accounts are included in a subsidiary ledger referred to as the
 a. accounts payable ledger.
   b. controlling ledger.
   c. miscellaneous ledger.
   d. accounts receivable ledger.
   e. general ledger.



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fwbard

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Answer to Question 1

Strengths:
 Current and quick ratios are above industry average and increasing
 Accounts payable are paid in a timely manner
 Overall debt has declined significantly and is well below the industry average
 Interest is covered by profits as are lease payments and the number of times covered has increased each year
 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

Weaknesses:
 The average collection period is increasing and is now above industry average
 Inventory turnover is below industry average and is extremely low indicating the firm does not move inventory well
 Fixed asset turnover, while increasing, is still below industry average
 Total asset turnover is decreasing which implies sales are declining and/or investments in assets are too high relative to sales
 Fixed charge coverage is below industry average and implies that the firm has significant operating leases
 Return on investment is declining due to significant investment in assets
 Return on equity is declining, but this is also positive as it is partially due to the significant decline in debt

Answer to Question 2

d





 

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