Efficiency Ratios:

Also called activity ratios, these ratios are used to assess the company’s short-term performance, that’s why here we mostly use current accounts of assets and liabilities. It also shows a firm’s ability to generate income.

Inventory turnover tells us, how many times the company had replaced its inventory in a year. Cool Plc has decreased slightly, because of a significant increase in inventory level and not being able to sell it. That’s why its day’s sales in inventory have increased from 80 days to 86 days. Moreover, its account receivable turnover has decreased to 7.30 from 9.46 in the last year, which also is an indicator of inefficiency in collecting its receivables. In addition, working capital turnover ratio and firm’s sales to inventory ratio have also decreased significantly, which also shows the inefficiency of the company to utilize its current assets and turning them into sales. Other factors might be a decrease in demand and an increase in competition.

Working Capital Management Ratios:

Basically, these ratios measures the ability of a firm’s current assets to meet the requirement of current liabilities. Generally, a ratio between 1.2 and 2.0 is considered satisfactory.

The current ratio of the firm has increased from last year’s, this is because Cool Plc has paid some of its liabilities and due to some operational inefficiencies, and current assets have increased. But when we look at the quick ratio, which is more reliable because it excludes inventory from current assets, so quick ratio of the firm is 1.19, which is favorable as compared to last year’s 0.76.

Working Capital Management Ratios   Formula 2017 2016
      margin   margin
Current Ratio = Current Assets 570           2.33 449           1.48
  Current Liabilities 245   303  
Inventory Turnover = COGS 1,180           4.24 994           4.56
  Inventory 278   218  
Collection Ratio = A/C  average Receivable 261               50             175               39
  Average daily sales 5   5  

Long-term Solvency Ratios:

It is the ability of the firm to meet its long-term debt obligations. Its shows whether thecompany is generating enough cash flows to pay back its long-term liabilities and if this ratio is higher, it means the the company is in stable positions and vice versa.

In the case of Cool Plc’s two years of performance, its debt to asset ratio has increased from 0.18 to 0.22, which is because of issuance of bonds atthe beginning of the year. But the ratio is not too high so that it will hurt its solvency. And it solvency is 1.75, which means the firm’s operation are strong and are able to meet and insolvency issue can be solved if arises.

Long-term Solvency Ratio   Formula 2017 2016
Long-term Solvency Ratio = EBIT 263           1.75 220  
  Non-current Liabilities 150   0  
Debt to Asset Ratio = Total Debt 395           0.22 303           0.18
  Total Assets 1,825   1,699  

Cash Conversion Ratio (CCC)

CCC basically evaluates the performance of management that, how quickly a firm can convert cash on hand to generate even more cash. This is the process, where cash is converted into inventory first and then into sales, and after accounts payable, through account receivable it converts back to cash…………………..

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