The following ratios have been calculated for Hi-Tech Toys. Analyze the capital
ID: 2798510 • Letter: T
Question
The following ratios have been calculated for Hi-Tech Toys. Analyze the capital structure, long-term solvency, and profitability of Hi-Tech Toys.
Leverage
Debt ratio (%) 65.3 57.2
Long-term debt to total capital (%) 46.8 17.6
Times interest earned (times) (1.5) 3.9
Cash interest coverage (times) 4.1 9.2
Fixed charge coverage (times) (0.4) 2.8
Cash flow adequacy (times) 0.3 0.8
Profitability
Gross profit margin (%) 54.7 58.6
Operating profit margin (%) (2.3) 7.4
Net profit margin (%) (3.4) 4.7
Cash flow margin (%) 4.3 8.9
Return on assets (%) (3.1) 3.2
Return on equity (%) (10.7) (9.9)
Cash return on assets (%) 3.8 8.4
Financial ratios 2015 2014Leverage
Debt ratio (%) 65.3 57.2
Long-term debt to total capital (%) 46.8 17.6
Times interest earned (times) (1.5) 3.9
Cash interest coverage (times) 4.1 9.2
Fixed charge coverage (times) (0.4) 2.8
Cash flow adequacy (times) 0.3 0.8
Profitability
Gross profit margin (%) 54.7 58.6
Operating profit margin (%) (2.3) 7.4
Net profit margin (%) (3.4) 4.7
Cash flow margin (%) 4.3 8.9
Return on assets (%) (3.1) 3.2
Return on equity (%) (10.7) (9.9)
Cash return on assets (%) 3.8 8.4
Explanation / Answer
In order to understand the capital structues and solvency, we need to look at the various solvency ratios that include debt and converage ratios
Debt Ratio has gone down from 65.3% to 57.2%, which indicates that firm has reduced it debt over asset or equity. That means firm has to reduced its leverage. It is supported further by looking at the coverage ratios such as cash coverage ratio or fixed charge coverage ratio, the ratio values have gone up indicate that siginficant reduction of interest payment, which is due to reduction of debt burden which we could see in debt ratio as mentioned above.
Similarly, looking at the profitibality ratios, we could see that all the profit margin ratios have gone up as well ROA, ROE have also gone up. That indicates that company able to generate more operating income that earlier and possible reason could be reducing interest expenses on those debt services it was provided earlier. Due to reduction of debt the interest expenses have gone down leading to increase of operating income.
The analysis leading to a conclusion that Hi-Tech Toys was successfully increased its profitability by reducing its portion of debt follwed by reduction interest expenses.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.