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Alliyanah - Apr 3
Alliyanah - Apr 3
deteriorating. As you can see the current ratio and quick ratio decreased from 1.07 to
0.67 and 1.26 to 0.53. Liquidity ratio decreasing results in less Working capital for the
company to run the business smoothly. There is a drastic decrease in Profitability ratios
in comparison to previous years. Company A should reconsider all its revenue related
decisions.The Debt to equity ratio is increased from previous year. This indicates that
Company A has borrowed this year resulting in the highest interest expense. High
interest expense leads to low operating income and net income. Even the efficiency
ratio is also affected this year. Due to sudden decrease in the sales, the profitability of
the company has decreased. However, it can also be noticed that operating expenses
have increased over the years because operating margin ratio has decreased with
greater difference than net profit margin. Activity ratios show improvement in age of
inventory and payable but it is concluded as the negative point for the business. While
decrease in other activity ratios means the total sales in the response of the assets has
decreased also the inventory turnover suffers in comparison to the last year.
To begin with the first financial ratio - Liquidity. We can see that the ability
of Company A to pay off its debt obligations was decreased because it was below 1 for
the current year 2019. This result indicates that Company A is in bad financial health
and more likely to face financial hardships that can affect its ability to borrow to the
creditors and lenders because liquidity ratio is one of the financial ratios that the lenders
review before they approve the loan of the company. Next, for profitability ratio, it was
also decreased which we can infer that Company A was not performing well by
business activities into profits and not properly utilized its assets in order to produce
revenue that will add value to the shareholders. Also, Company A's leverage ratio was
increased except in its Time Interest Ratio (TIR) that was decreased in the current year
which means that Company A' ability to pay its Interest Expense from different loans
and liabilities was reduced, but it's still normal since TIR is above 2.5. Overall, leverage
ratios of Company A indicates that the company has taken a larger amount of debt than
its capacity and that they might not be able to service the obligations with the on-going
cash flows. So, basically, Company A was aggressive in financing its growth with debt.
Lastly, efficiency ratios of Company A were unfavourable since most of them resulted in
declining because of the possibility that Company A didn't manage, utilize and use
show age to use its assets and manage its liabilities effectively in the current period or
in the short-term.
Recommendation
In order for Company A to have better and efficient results of its Financial
ratios, company A should be analytic in making decisions with regards to its operations.
Profitability should be increased by improving the sales and decreasing the operating
costs of the business. To make profitability ratio efficient, Company A can consider the
controlling of costs, increase the price of the products and expand markets. Interest
expense must be managed by decreasing the interest payment period. For liquidity
ratio, reduce its current liabilities by paying off its debt and cut some overhead
in the year 2019 from 2018. Debt collection period must be decreased and payable age
must be improved. Next for leverage ratio, Company A should still control its liabilities
that they use for investments. the return on investment should be higher than its
liabilities. Company should focus on decreasing the current liability and increasing the
current assets by managing the working capital. Fixed asset portion in the total assets
must be improved and decrease the non-current liability portion by decreasing the long-
term debt. Lastly, for efficiency ratio, Company A should manage its receivables in
order to easily use the cash for investments. Also, the time of converting inventory into
cash should also observe because company A inventory took almost a month before it
sold to the customers. Company A should utilize its assets also in order to generate
more profit by using its assets to generate more revenue. Company A should reconsider
its decision regarding Debt it borrowed in 2019. It should try to increase operating
income by doing additional marketing or it should negotiate with lenders about the
interest rate.In the long run, survival of Company A will be at stake if not acted
immediately.