Business Valuation Case Solution

Debt to equity ratio

This shows how much debt has been involved in the capital structure of the company. The company has high ratio of debt over equity in the year 2011 and 2012, but this got lowered in the latest years as it got down to 8.9% in 2015. The company has significantly increased its common share equity form year 2012 till 2014.

Ratio Analysis 2011 2012 2013 2014 2015
Leverage Ratios          
Debt to Equity Ratio 83.6% 45.8% 6.7% 20.9% 8.9%
Debt Ratio 66.0% 57.6% 35.6% 45.8% 41.0%
Cash Ratio 6.0% 13.6% 14.6% 10.0% 25.5%
Cost of borrowing 7.5% 9.6% 142.4% 10.9% 12.8%

Liquidity ratios

Current Ratio

This ratio explains the ability of the company to satisfy its short-term obligations from the current assets. The ratio was not favorable in the year 2011, where the current ratio was 0.89, which shows the company had poor liquidity. In the year 2012, the ratio started to become favorable and it got to 1.89 in the year 2015. The company now has greater liquidity, as it can pay 1.89 times of its current liabilities.

Quick Ratio

Quick ratio is same as the current ratio, but here; the inventory is excluded so that only highly liquid items are analyzed for current obligations. Here the situation is different from the current ratio, the ratio shows that the company had worst liquidity in the year 2011 and it got some betterment in the following years; but still, it is highly unfavorable with 0.42 in the year 2015.

Ratio Analysis 2011 2012 2013 2014 2015
           
Liquidity Ratios          
Quick Ratios 0.16 0.25 0.34 0.25 0.42
Current Ratio 0.89 1.19 1.84 1.56 1.89

Asset Utilization ratio

Fixed Asset Turnover

This ratio shows the company’s ability to use the net asset for the generation of earnings or return on the investment it has made in its assets. The ratio is in an increasing trend and it became 8 in the year 2015. The company is gaining efficiency and it is using the fixed assets in an effective manner to generate return for its shareholders.

Total Asset Turnover

Here the company has some better performance. This ratio shows how efficient is the company in utilizing its assets and generating profit by use of its assets. The ratio was 3.2 in the year 2011 and went up to 3.4 in year 2015. The company has been utilizing its assets well and it is generating $3.2 of net revenues by utilizing $1 of assets.

Inventory Turnover in days

The number of days the inventory took time to be sold is 87 in the year 2015. This shows that the company can sell up to 5 times its inventory in the whole year. The company has efficiency in inventory and selling activities.

Accounts Receivable Turnover

The company has no accounts receivable balance and this shows that there are no credit sales by the company.

Accounts Payable Turnover

The payable turnover in days is also highly favorable, since the company has adopted the strategy to pay off its payables as soon as possible. The company takes hardly a month to pay off its payables.

Cash Conversion Cycle

The cash conversion cycle is the period that shows the overall life of the money or cash from investment in the production as raw material and to the finished goods and after its sales, finally return with extra earned money. The cash conversion cycle suggest that the company needs 56 days in year 2015 and at an average of 56 days to have its cash back in hands, which is quite a favorable situation. However, the cash reserves are not that favorable. The reason might be heavy investing strategy………………………

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