The average gross margin ratio for a successful jewelry business is around 50% however, the ratios for the company have been lower than 50% and 30% in the three-year period. This shows that Long Jewelers is either pressurized by the competition in the market or it has reduced its prices by reducing the margins to attract more sales. The inability of the management to make high margins, can result in inefficient operations of the company. The profit margin and the basic earning power ratios were both negative in 2003 and they were typical in other two years. The profit margin was lower than 5% average of this industry. Similarly, the return on assets and equity depicts the same picture. If the company wants to turn things around then it needs to increase the margins.
If we look at the liquidity ratios, then Long Jewelers is in an alarming situation as the quick and current ratios are both too low and they both show a negative trend. If the sales declined or there is a decline in the operational performance of the company, then the company might be forced to face termination. The company does not have enough short term assets to repay short term obligations if they become due now.
The turnover measures of payables and inventory are low while the total asset turnover and fixed asset turnover ratios are good suggesting an efficient use of the assets of the company. The amount of the long term assets is however, low therefore, the evaluation of total asset turnover might not be accurate. Jewelry is a high margin and low turnover product and this is reflected by the inventory turnover ratio of the company but this is being offset by higher margins. The turnover ratios are improving and the CCC of the company is negative in 2003 and 2004 suggesting strong operational activities and utilization of the assets. The days in receivables are major factor contributing to this because the company does not hold any accounts receivables and all the payments are either made in cash or through a commercial credit card.
Finally, debt ratios have been computed and the trend and the ratios show that the company is off the chart as the level of debt exceeds the level of the total assets of the company. The company is highly levered and the interest cost has been increasing in each year. The time interest earned ratio has declined significantly suggesting that the company does not have enough profits to cover the interest expenses. The equity amounts are negative therefore, the debt to equity ratios does not give a meaningful figures (NMF) for these ratios.
A short growth analysis has been performed by computing the growth rates of sales, total assets, liabilities, gross margins and net income before tax. This is shown below:
|Growth in Sales||-0.03%||2.99%|
|Growth in Gross Margin||-34.42%||61.30%|
|Growth in Net Income Before Tax||-232.23%||NMF|
|Growth in Total Assets||-0.94%||-37.70%||-8.59%|
|Growth in Total Liabilities||-4.91%||-19.33%||-11.55%|
There is insignificant growth in sales and negative growth in total assets and liabilities. Since the net income before tax in 2003 is negative therefore, the profitability and gross margin figures in 2003 and 2004 does not represent meaningful figures. The company is now being forced to downsize because of its unprofitable operations and the growth of the company is low……………
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