How would you explain these financial ratios? How could you improve them? Liguid

Question

How would you explain these financial ratios? How could you improve them?

Liguidity Ratios Capital Structure Ratios 2016 2015 2016 2015 Current Ratio 1.39 1.33 Debt Ratio 63% 59% Times Interest Earned Acid Test 1.09 1.02 2.25 15.34 Average Collection Period 19% 21% Market Value Ratios 2016 AR Turnover 5.37 4.82 2015 Price Earnings 95.25 12.97 Inventory Turnover 11.13 8.73 Market to Book 0.0159 0.0097 Profitability Ratios ROA 0.01 0.07 2016 2015 GPM 21% 21% UnKnown 0.04 0.17 OPM 2% 12% NPM 1% 8% OROA 2% 11% ROE -9% -53%

Explanation / Answer

Liquidity ratios such as current ratio and quick ratio has improved may be because of more accounts receivable shown on the balance sheet as inventory turnover has increased and AR turnover has increased but average collection period has decreased which shows tighter credit policy, ore efforts are made by company to collect accounts receivable.

These ratios are already increasing, to further improve them the company can reduce current liabilities, or increase short term investments but that would require extra cash.

2. Profitability ratios are much on the lower side that is OPM, NPM, OROA have reduced drastically may be due to more expenses both operating and non operating. But GPM remains the same. On the other hand there is a significant change in ROE which was - 53% in 2015 but reduced to -9% in 2016. These van be improved with better sales prospect, lowering the costs, decisions on lease or renting of FA, disinvestment of the unprofitable divisions, or product lines and investing in other products with better margins.

Capital structure ratios such as debt equity ratio that is debt as a percentage of equity has increased which is a negative side for equity shareholders. These can be improved by lowering debt in relation to equity but that also in a planned manner so that it may not affect shareholders adversely.

Market value ratios such as PE has increased though earnings would not have increased drastically because the firm is overvalued in the market and it might face correction. Market to book ratio has increased due to improved ROE. Return on Assets has decreased the company should liquidate some of its non operating assets and pay off debt holders do that would improve both capital structure and return on Assets.

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