Question

In the 'Discussion' worksheet discuss the financial health of this business with respect to solvency, liquidity, profitability, and financial efficiency. For liquidity and solvency you have two years' worth of data to interpret for this firm. Benchmarks for juice manufacturers are provided in the worksheet for comparison purposes

Answer 1

• In terms of liquidity, the business is having a CR of 1.30 in current year as compared to benchmark of 1.70 of the industry, though the enterprise has improved from the previous year, still it needs to reduce its working capital cycle in order to increase the liquidity of the assets.
• In terms of solvency, the business is having D/A of 1.92 as compared to the benchmark of 0.4 which indicates that the business has high debt funds involved which increases the risk of insolvency, since the cost of debt is high and is fixed irrespective of the profit margins. The company needs to introduce the equity funds and reduce the proportion of debt funds for better profitability.
• In terms of profitability, the business has quite low profitability ratios as compared to the benchmark, it needs to improve its profits by reducing the cost of debt in the firm in order to survive in the market.
• In terms of financial efficiency, The business has better asset turnover ratio as compared to the benchmark which indicates the business is able to generate more volume of sales from less amount invested in the assets. But the OER is high in comparison to benchmark which is a negative indicator that means the operating expenses are high in comparison to operating income.