Analysis of financial statements of charter company Case Solution
The inventory turnover refers to the days in which the inventory is being converted into sales. There is a depressing figure for inventory turnover of the Charter Company as the inventory turnover has deteriorated from 1980 to 1983 and it went from 19 times to 10 times and this is not good for the company as it shows an unsuccessful attempt of the company for converting its inventory into sales. If the inventory turnover is low, then this will lead to more inventory being stored in the warehouses and this gives rise to the risk of inventory being obsolete and outdated. This can possibly lead to the write off of the inventory in accounts thus decreasing profits further.
The total assets turnover shows that how efficiently the company is using its resources i.e. its assets to convert the raw material into sales. The company has a fluctuating total asset turnover in 1980s it whereas, in 1981 it showed slight improvement and became 3.02 whereas it declined to 2.35 in 1982 and it again increased sharply and became 3.31 in 1983.This shows that the company is sometimes efficient and sometimes inefficient in the course of its operations. (Peavler, 2017)
- Liquidity ratios:
The liquidity ratios of the company mainly include the current ratio and quick ratio. The company’s liquidity doesn’t seem to be good as the current ratio of the company is decreasing continuously whereas the quick ratio is also decreasing but sometimes the quick ratio shows a sharp increase.
The current ratio is worsening as the company has acurrent ratio of 1.44 in 1980 and its deteriorated year by year and the current ratio was 1.14 in 1983.The current ratio shows the liquidity position of the company as it is important for the survival of the company that the availability of the cash is required in order to carry out day to day operations of the company.
The quick ratio is another measure of the liquidity of the company as the quick ratio excludes the inventory and takes into account all those items which can easily be converted into cash if liquidity problems arise. The ideal quick ratio of 1 is best for the company as it shows that to pay a $1 of liability of the company the company has $1 of funds available. The quick ratio of the company increased from 0.89 to 1.03 in 1981 whereas then it started decreasing continuously from 1.03 to 0.62 in 1983. (Bragg, The difference between current ratio and quick ratio, 2013)
- Solvency ratios:
The company’s total liabilities to total equity ratio show that how much liabilities they have in comparison to the equity available. The company’s total liabilities to total equity ratio fluctuates as it were 5.17 in 1980 and it shows that for each $1 of equity the company has $5.17 of liability to pay. This shows that the company is highly financed by outside liabilities and cash is arranged in a way that the outside portion of debt is higher than the equity available in the company. The company’s total liability to equity ratio decreased to 4.30 in 1981 and it started increasing after 1981 and in 1983, the company’s total liabilities to total equity were 6.61.
The company’s total long term debt to long term debt plus equity was decreasing as it was 0.42 in 1980, it declined to 0.34 in 1981 and it then increased to 0.46 and again declined to 0.39.The company’s total long term debt to long term debt plus equity shows the total debt in comparison to the whole equity invested in the business…………
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