From the calculation, we found that the net profit margin ratio was increased. It was 8.91% in the year before last and 13.10% in the last year. It shows that the company was selling well which is good for the company.
Inventory Holding Period
A high number of days inventory indicates that there is lack of demand for the product being sold whereas a low days inventory holding period may indicate that the company is not keeping enough stock on hand to meet the demands.
It is known from the above calculation that the inventory holding period for the company in the year before last was 63 days and for the last year it was 95 days. So, this extension in the inventory holding period is a problem for the company which obstructs the path of cash generating.
Average Collection Period of Trade Receivables
This ratio indicates the speed with which debtors/accounts receivables are being collected. A short, collection period implies prompt payment by the debtors. It reduces the chance of bad debts. Similarly, a longer collection period implies too liberal and inefficient credit collection performance.
From the calculation, we found that, the collection period for the debtors/accounts receivables for the year before last was 42 days whereas for the last year it was 61 days. So, it indicates that the company was inefficient in its credit collection performance. This delay in the collection of receivables, may have adverse effect in the liquidity position and also there lies possibility of accounts receivables being bad debts.
Sales to Capital Employed Ratio
It is the ratio which indicates the relationship between the capital employed and sales revenue. The higher the ratio the higher is the revenue, the lower the ratio the lower the revenue.
From the calculation, we found that the ratio of capital employed in the year before last was 1.34 times and for the last year it was 1.44 times. It indicates that the Pace Leisurewear Ltd was generating more revenue.
Current Ratio
The ratio of total current assets to total liabilities is current ratio. It measures the short term solvency, that is, its ability to meet short term obligations. The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they come due at that point.
From the calculation, we found that the current ratio for Pace Leisurewear Ltd in the year before last was 1.76:1 and for the last year it was 1.44:1. This ratio indicates that the short-term solvency of the company was getting poorer.
Quick Assets ( liquid or acid test) Ratio
It is the ratio between quick current assets and current liabilities. It shows a firm’s ability to meet current liabilities with its most liquid assets. Companies with the ratio less than 1, are supposed to be in vulnerable condition. Such companies are unable to pay their current liabilities, which show the dependency of current assets on inventory.
In case of this company, it was found that quick assets ratio was getting weaker. It was 0.78:1 in the year before last and 0.47:1 in the last year. It indicates that the company was in difficulty of paying current liabilities. It was even weaker in the last year than the year before last.
Gearing Ratio
The higher the gearing, the higher the dependence on borrowing and long term finance. The lower the gearing ratio, the higher the dependence on equity financing.
Here, in case of this company, the gearing ratio for the last year was 42.3% and 34.4% for the year before last. It shows that the company had a reliance on sources of long term loan.
Conclusion and Recommendation
From the above calculation and interpretation of the ratio and its analysis based on the two years’ financial statement of the Pace Leisurewear Ltd, we came to know that the company was facing mainly a liquidity problem. In order to get rid of such fina
