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Financial Ratios.
Based on the financial statements for LOVELY CO. determine and comment its financial ratios for 2005:
1) Short-term solvency
2) Activity
3) Financial leverage
4) Profitability
5) Activity
1) Short-term Solvency
a) Current Ratio: the ability of the firm to meet its current liabilities
Industry average = 1.8
- too big compared to the industry average: Why?
- Maybe it could reduce its Acc. Rec. by cashing in its clients?
b) Quick ratio
Industry average = 0.8
- this is my capacity of paying my current liabilities without relying on the sale of inventories- too big compared to the industry average: Why?
2) Activity: How are the firm’s assets managed?
a) Total Asset Turnover
Industry average =2.5
- too low compared with industry average
- the firm doesn’t generate enough revenues for the assets it uses
b) Receivables turnover & Average collection period
Industry average =30days
- too low compared with industry average: Lovely can’t cash in its clients in a normal period
c) Inventory turnover
Industry average =8.0
- too low compared with industry average: Lovely uses too many inventory. Its money are stocked into inventories
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