A critical analysis of Liquidity, Profitability and Efficiency

the industry average of current ratio is 2.2:1.company A is showing better current ratio of 2.63 as compared to industry average of 2.2 which mean that the company A bears a greater ability to paid its bills . Company B and C have less current ratio as compared to the industry average which means that the performance of these companies are not up to standard however company C’s current ratio is slightly greater than the industry average which shows that the performance of company C is satisfactory.

The industry average of quick ratio is 1.5 whiles the average quick ratios of companies A B and C are 1.99, 1.54 and 1.71 respectively which shows that the said companies posses a greater ability to pay their bills however only the company D quick ratio is slightly less than the industry average ratio which is 1.48 which mean the company needs to review its liquidity plans .

PROFITABILITY

The industry’s average of ROCE is 15% and the average ROCE of companies A Is 19.3%, company B is 21.26%, company C is 28.24% and company D is 31.13 which means that the companies are earning a good return on their capital employed.

Company C and D gross profit ratios are 53.14% and 56% which are comparatively better than the industry’s average of 48% however company B gross profit ratio is 48% which equals the industry’s average but company A GP ratio is 43.75% which is less than the industry’s average. It is suggested that the company A should reduce its cost of sale or increase its sales revenue.

The industry’s average of operating profit ratio is 40% unfortunately company A and B both have low operating profit ratio which are 33.75% and 38.28% respectively which indicates that both companies A and B has low control in their operating expenses on the other hand

companies C and D have better operating profit ratios which are 46.63% and 48.73 showing that the management of both companies bears a good control on their expenses.

EFFICIENCY

Companies A B and C have high stock turn over which are 63.88, 75.43 and 71.22 all three companies exceeds the industry’s average of 35 days which means that there could be a problem in their demand and supply due to which companies inventory is not easily converted into finish goods hence there are not able to effectively sale their products.

Note: Company D stock turn over ratio cannot be calculated because of unavailability of required data.

The industry’s average of total turnover ratio is 0.9 time and in this regard all the four companies have good total turnover ratio which are 0.95, 0.93, 1.01 and 1.06 showing the good return on their assets.

INVESTMENT

There is no such parameter by which one can compare the earning per share with the industry’s standards. However we can compare EPS among the four companies that EPS of companies C and D are 0.98 and 0.88 is comparatively good than the companies A and B of 0.54 and 0.56 respectively.

As far as the position of best company is concerned company D is said to be the best company because of better ROCE 31.13 which means the company is earning highest profitability, EPS 0.88 indicated earning per share is very good and dividend cover 3.68 the shareholders of the company receiving handsome dividend.

ANSWER 1 (B)

Company D shows a good charm for the shareholders because its earning per share is higher is 0.88 as compare to other companies like A and B but slightly less to company C which EPS is 0.98 however company D also have better dividend cover of 3.68 which depicts that it is paying its shareholder more than any other said company pay however company C once again a big rival in payment of dividend has a dividend cover of 3.38.

On the other hand management of company D plays a remarkable role in utilising the shareholders funds hence reducing the long-term liabilities option because of less long term liabilities company D also has to pay less amount of interest on these loans as compare to other companies.

Therefore it is suggested to invest in company D from shareholder perspective.

ANSWER 2(a)

ANSWER 2 (A)

CRITICAL ANALYSIS

The net present value is a discounted cash flow approach to capital budgeting. The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flow less the proposal’s initial cash outflow. If an investment project’s net present value is zero or more, the project is accepted, if not, it is rejected. In this case of Tridad ltd the NPV is -6384.24 which means the value is less than zero therefore the project is not viable for the company.

ANSWER 2(B)

The internal rate of return is 13%

ANSWER 2(C)

If a refinancing option (overseas loan) were to be taken then there are many risks that the company might face like

FINANCIAL RISKS:

forex risk

hedges

overseas government policies

WAYS TO DEAL :

There are couple of ways which can be use to deal with the said financial risks

Loan with fixed interest rate

Buy futures which will give the company assurity of the expected future cash outflow- Reduces uncertainty and any cash problems that could be used due to this.

ANSWER 3(A)

Proposed profit 91,552 Proposed profit 78,832

Break-even hours 1,393 Break-even hours 1,574

Break-even Sales 208,955 Break-even Sales 340,000

ANSWER 3 (B)

Boris Plc has an operating profit of 91552 in scenario 1 and 78832 in scenario 2 at the sale turnover of 345600 and 497664 in scenario 1 and 2 respectively. For achieving the break-even at least 1393 hours in scenario 1 and 1574 hours in scenario 2 have to be sold out so that variable cost can be observed.

Break-even techniques are based on marginal costing therefore fixed cost plays a significant role company’s operating results and performance. In the long haul fixed cost needs to be fully observed hence absorption costing approach is critical to be planned in the long term decision making plan.