- Strengths of A.B. Company
AB company has very experienced management which understands the business well.
The current ratio of ABC company is more than the industry for all three years under review. The same trend is apparent in terms of quick ratio and cash ratio. This shows that the company has excessive cash reserves as compared to the industry.
The inventory turnover of AB company is much higher than the Industry and has improved throughout the three year’s period. As a result, the average inventory days are less than half of that of the industry and so the AB company’s inventory management is very efficient.
The payable turnover of the AB company is more than the industry throughout the last two years. Whereas it was less than that of the industry in 2013. the payable days are also less than that of the industry and have decreased during the last three years under review. This means that the company is paying vendors quickly as compared to the industry. However, it may also be receiving significant discounts due to paying rather quickly. more information is required in this regard.
The company’s net profit margin is more than double as compared to industry throughout the past three years. This is in spite of the fact that the gross profit margin of the company is slightly less than that of the industry. Apparently, the company is controlling its operational expenses strictly that is contributing to higher net income.
The Asset turnover of AB company is better as compared to the industry throughout the past three years. As a result, the return on asset is more than three times as compared to the industry.
The return on equity of AB company is also more than three times to that of the industry. This means the company is utilizing its resources greatly to add to the shareholder’s income.
The debt to equity ratio of AB company is less than that of the industry and has decreased over the past three years. It means the company has the potential to expand through acquiring more debt along with using its excess cash resources.
The cash and cash equivalents of AB company are much higher at 31% of the total assets as compared to that of the industry which is just 6%.
The property plant and equipment are just 17% as a percentage of total assets for AB company as compared to 36% for the industry. Combining it with the asset turnover ratio shows that the company is utilizing its assets very efficiently.
Total long term debt for AB company is much lower than that of the industry at 12% of the total assets as compared to 22% for the industry.
The stockholder equity for the AB company at 46% is also much higher than that of the industry which is just 39%. The higher the stockholder equity means the company can acquire more debt if the company keeps the debt ratio equal to that of the industry.
- Weaknesses of A.B. Company
The receivable turnover of AB company is slightly lower than the industry. The difference is more prominent in 2015 where the industry’s receivable turnover is 7.55 but AB’s turnover is just 6.42.As a result, the receivable collection days of AB company are higher than the industry.
The accounts receivable as a percentage of total assets are also very high for AB company at 45% as compared to just 27% for the industry in 2015.
However, the accounts receivables are growing at a slow pace as compared to the industry
The current liabilities of AB company are slightly higher than that of the industry at 42% in 2015 as compared to 39% for the industry. The main difference is due to the accrued expenses.
The accounts payable as a percentage of total assets for AB company are higher than that of the industry at 19% of the sales in 2015 as compared to 17% for the industry. It may deteriorate the relationship between the vendors and the company. However, the company is trying to decrease its accounts payable as evident from the ratio analysis of the past three years.
- Key issues facing A.B. Company
The most prominent issue is that sales growth is declining as compared to the industry growth rate.
The company has too much cash at its disposal. The company needs to find its use, probably in supporting sales or should pay back debt or buy back shares if it finds no way to increase its sales.
The company has a higher payable as compared to the industry. That is probably the reason why the cost of goods sold for AB company is higher than that of the industry.
- Recommendations to Mr. Smith
The AB company needs to pay out some of its accounts payable early and seek for the early payment discounts. This is important because the cost of goods sold by AB company is higher as compared to industry and it also has an excess cash reserve.
The company should seek to increase its sales through sales promotion activities as its sales growth rate is declining.
It should buy back some equity shares as it has excessive cash reserves.
The company is doing really well and is earning more than twice income as a percentage of sales. There is no need for reconstruction.
- Do you agree with the Consultant’s report?
No, I do not agree with the consultant’s report. Most of his findings are not true as evident from the above analysis.
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