8/13/2019 Fin254(Incomplete) 12345

1/22

Liquidity Ratios: Liquidity ratios attempt to measure a company's ability to pay off itsshort-term debt obligations. The analysis of these ratios is done by comparing a company's

most liquid assets (those easily convertible to cash) to its short-term liabilities. So the liquidity

ratios show the relationships between the firms current assets to its current liabilities.

Current Ratio: !urrent ratio measures the number of dollars of current assets for eachdollar of current liabilities. "t helps to estimate the capacity of the firm to meet its

maturing obligations#

Current Ratio=(Current Assets/Current Liabilities)

2007 2008 2009

Square 1.27 1.21 1.35

Prime 1.0 1.0! 1.07

"t is seen that for $rime Te%tiles Ltd.# there is a gradual decrease in current ratio from

&. in year * to &.* in the year +.The !urrent ratio decreases because current

asset over the last three years decreases gradually followed by gradual increases incurrent liabilities. The decrease in current ratio tells us that the $rime Te%tiles is

degrading year by year but in comparison to them# Square Te%tiles is in a better financial

position. "n case of Square Te%tiles# current ratio increases from &.* in the year * to&., in the year + with a downfall in the year with a current ratio of &.*. The

standard deviation for current ratio is &. /n an average over the last three years# current

ratio for Square Te%tiles is &. times than whereas current ratio for $rime Te%tiles on an

average is &.*. So both the companys are standing at the same line and needs to betteroff their position. 0ut since $rime Te%tiles ration is gradually decreasing# it needs to

overcome it# whereas Square Te%tiles is in the upward position. This may have happened

due the reduction of the number of 1ebtors and due to an increase in the number of

8/13/2019 Fin254(Incomplete) 12345

2/22

creditors of Square Te%tiles# which has helped it to be in a better position# though $rime

Te%tiles is not very far behind.

Quick Ratio:The quic2 ratio or the acid-test ratio is a liquidity indicator that further refinesthe current ratio by measuring the amount of the most liquid current assets there are to cover

current liabilities. The quic2 ratio e%cludes inventory and other current assets# which aremore difficult to turn into cash.

(Current Asset Inventories) / Current Liabilities

2007 2008 2009

Square 0."2 0.7! 0."!Prime 0.!! 0.#" 0.3"

Interpretation:

"n case of Square Te%tiles# there is a gradual increase in quic2 ratio from .+ times in year *

to .+3 times in the year +# with a downfall of .*3 in the year . The increase in quic2

ratio is because the companys current asset e%cluding the inventories are increasing graduallyeven though there is a gradual decrease in liabilities from year * to year +. The increase in

quic2 ratio is quite favorable for the company. 4ote that# even if the inventory level is highest in

compared to * and +# the difference between current asset and inventory isincreasing gradually along with decrease in current liabilities for which quic2 ratio shows a

gradual increase. This tells that Square Te%tiles is able to meet its financial obligations out of

current liquid assets. "n case of $rime Te%tiles# quic2 ratio decreases from .33 in the year *

8/13/2019 Fin254(Incomplete) 12345

3/22

to .5+ in the year and to .,+ in +. The benchmar2 for quic2 ratio is &&. "n comparison

to $rime Te%tiles# 6uic2 ratio is better for Square Te%tiles# which is on average .(a little less

than the benchmar2) whereas $rime Te%tiles has a quic2 ratio of about .& over the last threeyears. This tells us that $rime Te%tiles has lots of wor2 in progress# or unsold products which

have caused its inventory to be high.

Net Working Capital: 7or2ing !apital measures the percentage of total assets that is invested

in current assets. "t helps to analy8e capital intensity as well as corporate liquidity.

47!9Current Asset/ Total Asset

2007 2008 2009

Square ##!$"23$#12

5"3$7"$5#

35$51$#21

Prime 55$7!3$1#0 !1$"22$2" 57$501$53

Interpretation: :rom the analysis done# Square Te%tiles is in a much better position topay off it short time liabilities in comparison to $rime Te%tiles which is falling much

behind. This might have occurred because a larger amount of the total assets is used to

cover the current assets. Sufficient wor2ing capital provides assurance to short-termcreditors that they will be paid by the company as soon as possible.

8/13/2019 Fin254(Incomplete) 12345

4/22

8/13/2019 Fin254(Incomplete) 12345

5/22

Total Asset Turnover:The total asset turnover(T

8/13/2019 Fin254(Incomplete) 12345

6/22

Inventory Turnover: Cost of goods sold/ Inventory

2007 2008 2009

Square 107.55 17.73 102.73

Prime 71." 1#.30 177.!0

Interpretation:

There is a gradual decrease in inventory turnover from &*. times in the year * to

&.*, times in the year + in case of Square Te%tiles. This indicates that cost of goods

sold has decreased gradually and number of inventory in the warehouse has increased in+. Square Te%tiles has not sold and stoc2ed its inventory more which is unfavorable.

$rime Te%tiles inventory turnover increases from *&.+ times to &**.3 times in the year

* to +. The reason behind this is increase in cost of goods sold from * to +.

The data analysis shows that $rime Te%tiles has a better inventory turnover than SquareTe%tiles.

Days Sales Outstanding The 1ays Sales /utstanding ratio shows both the average time it

8/13/2019 Fin254(Incomplete) 12345

7/22

ta2es to turn the receivables into cash i.e. how much time it ta2es to collect money from

collectors and the age# in terms of days# of a company's accounts receivable. This ratio is of

particular importance to credit and collection associates.

Days Sales Outstanding: e!eivables/ (Annual Sales/"#$)

2007 2008 2009

Square 117.!7 202.0! 15.2!

Prime 72.3 7.03 57.57

Interpretation:The days sale outstanding for Square Te%tiles increases graduallyfrom &&*.3* days in the year * to &.3 days in the year + which is a very bad

sign. This tells us that Square Te%tiles has worsen its credit sales collection over the lastthree years. @owever# $rime Te%tiles 1ays Sales /utstanding shows a steady decrease

from *., days in the year * to *.* days in +# which is favorable for $rime

Te%tiles. "t shows that $rime Te%tiles is able to collect its receivables more effectivelythan that of Square Te%tiles.

Leverage

Total Det to Total Asset The debt-to-asset ratio tells us how much of the total assets are

8/13/2019 Fin254(Incomplete) 12345

8/22

financed by the overall liability of the company.

Debt to Asset atio: Total Liability/ Total Asset

2007 2008 2009Square ##.7", #."5, #3.37,

Prime 53.25, 5!.3", 3#."1,

"nterpretation The debt to asset ratio for Square Te%tiles shows a slight decrease from 55.*+A in

the year * to 5,.,*A in the year +. /n the other hand# in case of $rime Te%tiles# debt to

asset ratio falls gradually from ,.A in the year * to ,5.+&A in the year +. "n the year

+# Square Te%tiles 5,.,*A of total asset were financed by debt i.e. for every T; & of asset#

T; .5, were financed by debt. /n the other hand# in the year +# $rime Te%tiles ,5.+&A of

total asset were financed by debt i.e. for every T; & of asset# T; ., were financed by debt.

@ence# $rime Te%tiles with lower debt to asset ratio is in a favorable position than Square

Te%tiles from the view point of creditors# because lower the debt ratio# the greater the cushion

against creditors losses in the event of ban2ruptcy.

8/13/2019 Fin254(Incomplete) 12345

9/22

Det!"#uity Ratio The debt-to-equity ratio is a leverage ratio that compares a company's total

liabilities to its total shareholders' equity. This is a measurement of how much suppliers# lenders#

creditors and obligors have committed to the company versus what the shareholders havecommitted.

Debt to %&uity: Total Debt / S'are'olders %&uity

2007 2008 2009

Square 1.11, "5."1, 7!.5,

Prime 113."2, 12".32, 53.!3,

"nterpretation "n case of Square Te%tiles# 1ebt to ?quity ratio decreases from &.&&A inthe year * to *3.A in the year +. This is because debt is decreasing gradually

year by year and lower debts are financed by increasing equity. $rime Te%tiles debt to

equity ratio decreases gradually from &&,.+A in the year * to ,.3,A in the year+. This is because increasing debts are financed by increasing equity. The data

analysis suggests that $rime Te%tiles has a lower debt to equity ratio compared to Square

Te%tiles which is quite favorable for $rime Te%tiles.

Ti$es Interest "arned%TI"& Ratio The interest coverage ratio is used to determine how easily a

company can pay interest e%penses on outstanding debt. The lower the ratio# the more thecompany is burdened by debt e%pense.

Ties Interest %arned: %arnings before Interest and In!oe Ta*es / Interest C'arges

8/13/2019 Fin254(Incomplete) 12345

10/22

2007 2008 2009

Square #. 3.53 3.5!

Prime 2.21 2.!! 1.!1

"nterpretation

Square Te%tiles T"? ratio decreases gradually from 5. times in the year * to ,.3 times in

the year +. The reason behind this is that Summit $ower has larger amounts of debt and longterm loans and the increasing debt as well as more long term loans causes the interest charges to

increase# thus decreasing the T"? ratio. Boreover# T"? ratio for $rime Te%tiles increases from

.& in year * to .33 in year and falls drastically to &.3& times in year +. The reasonbehind this fluctuation is because interest e%pense falls.

8/13/2019 Fin254(Incomplete) 12345

11/22

2007 2008 2009

Square !.17 #.# 5.1!

Prime 2.2# 2.!" 1.!3

"nterpretation "n case of Square Te%tiles# !ash flow to debt ratio decreases from 3.&* in year

* to .&3 in the year +. This is because over the last three years# amount of debt has

increased followed by decrease in cash flow from operations# thus causing the cash flow to debtratio to decrease. $rime Te%tiles# on the other hand# has a cash flow to debt ratio of .5 in the

year *# followed by a improvement in of .3+ in and then a gradual decrease of &.3, in+. The fall in cash flow to debt ratio is due to the fact that Square Te%tiles is increasing debt

over the last three years. The data analysis suggests that Square Te%tiles is in a better position tocover its debt from operating activities whereas $rime Te%tiles has a higher amount of debt# also

they have a high 1ebt ratio# in regards to their 1ebt their operating cash flow has not increase

that much# hence this has caused a Lower T"?.

-rofitability atios: $rofitability ratios distinguish the different measures ofcorporate profitability and financial performance. These ratios give a good understanding of howwell the company utili8ed its resources in generating profit and shareholders value.

The long-term profitability of a company is vital for both the survivability of the company as

well as the benefit received by shareholders. "t is these ratios that can give insight into the allimportant CprofitC.

8/13/2019 Fin254(Incomplete) 12345

12/22

*ross +ro(it ,argin:The gross profit margin is used to analy8e how efficiently a company

is using its raw materials# labor and manufacturing-related fi%ed assets to generate profits.