Gross Margin | Reasons:
- The cost of sales(as a percentage of sales) is high. This reduces profits.
- Category 1 and 2 have higher costs as compared to Category 3.
Actions
- Improve production efficiency of category 2 and 3.
- Improve overall production efficiency so as to at least meet the industry standards.
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Net Operating Margin | Reasons:
- High operating expenses is the major cause of poor operating margin.
- There may be operational inefficiencies such as overstaffing, poor cost control mechanism, lower productivity, etc.
Actions
- Improve operational efficiency by minimizing wastages and maximising productivity.
- Ensuring adequate cost control during production process.
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Return on Assets | Reasons:
- The ratio is close to industry standard. This means that this company’s return on assets is almost similar to that of other companies in the industry.
- This shows that the company is efficiently able to convert its investment in assets to profit.
Actions
- The company can work on its efficiency to bring the ROA to the industry standard.
- The company should aim at ROA higher than industry standards as this is a means for comparing different companies within the industry.
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Return on Equity | Reasons:
- The company’s ROE is not stable over the 3 years. This may be due to inconsistent utilisation of shareholders’ funds by the company.
- In the 3rd year, the company has performed better than the industry standard. This is due to efficient utilisation and management of shareholders’ funds.
Actions
- Adopt a suitable strategy for ensuring a consistent management of the shareholders equity in order to eliminate such fluctuations in return.
- The company should maintain progressive trend of profits so that investor confidence can be ensured. Also, the company can work on improving the return on shareholders’ investment.
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Productivity Factor | Reasons:
- The productivity factor is low as the resources are inefficiently used.
- The inputs are not able to generate outputs as per the industry standards.
Actions
- The company should improve their operational efficiency and ensure better utilisation of inputs.
- The company should try to minimise wastages and eliminate any inefficiency in operations as it is very important to improve this ratio.
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Stock Turnover | Reasons:
- The consistent stock turnover shows that the firm has a stable and efficient stock management strategy.
- Since the company is also under trading, high stock turnover may be due to inefficient buying and administering of inventory.
Actions
- The company should ensure that it efficiently administers its inventory management.
- It should try to improve sales efficient along with inventory management. Only the high inventory turnover will show positive signs for the company.
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Stock on Hand Period | Reasons:
- This is lower than the industry average which shows that the company holds inventory for less number of days.
- This period will show the sales and Inventory management efficiency of the company.
Actions
- The company should try to maintain the current inventory period as it is a positive sign of efficiency.
- The company also need to ensure that the short inventory period is also supplemented by efficient sales.
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Debtor Collections Period | Reasons:
- It depicts the number of days in which the company receives payment from its customers. This is high showing that funds are locked up with customers for long time.
- Due to poor sales efficiency, the firm may be forced to offer better credit term to attract customers.
Actions
- The company should try to reduce this period on a priority basis as this adversely affects cash flows in the company.
- The firm should offer credit terms as per the industry trend so that the firm does not dace paucity of liquid cash.
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Creditor Payment Period | Reasons:
- The firm may be able to obtain good credit terms from its suppliers due to good market reputation.
- On the other hand, high payment period could also be due to inability of the company to pay back in time.
Actions
- The company should ensure sufficient cash flows so that it can pay back within the stipulated time.
- The company should adhere to the industry norms of payment so that it can easily obtain credit in the future as well.
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Working Capital Cycle | Reasons:
- Low working capital cycle may be due to efficient conversion of current assets and current liabilities into cash
- This is a positive sign as it is lower than the industry standard.
Actions
- The firm should maintain the current cycle as it is beneficial for the company.
- The firm should continue with its current working cycle.
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Working Capital Percent | Reasons:
- The recent fall in the ratio may be due to high current liabilities of the company.
- The rise in the ratio during the 1st and 2nd year could be due to improved profitability during that period.
Actions
- The firm should maintain the ratio at the current level.
- The ratio being higher than the industry standard shows better relative working capital management by the company.
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Over or Under Trading | Reasons:
- It may be due to large amount of current assets.
- Under trading may also be due to large amount of idle and poorly managed funds.
Actions
- The business should use surplus cash in other profitable ventures, such as through diversification.
- The firm needs to efficiently manage current assets. This need to be done on a priority basis as under trading can be very harmful for the company and its goodwill.
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Current Ratio | Reasons:
- Low current ratio may be due to high amount of current liabilities.
- The ratio has decreased from the 2nd to the 3rd year. This may be due to inefficient assets management by the firm.
Actions
- The company should try to achieve a better balance between the current assets and current liabilities so as to meet the industry standard for liquidity position.
- The steep rise in current liabilities should be controlled. This can be done by reducing the creditor payment period as well.
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Quick Ratio | Reasons:
- The worsening of the ratio during the 2nd to 3rd year may be due to the rise in current liabilities.
- The ratio shows negative signs for this company as it has a poor liquidity as compared to the general level of liquidity maintained by the competitors.
Actions
- The company should make payments on time to reduce current liabilities.
- The cash flow should be improved as it is the most liquid asset that the company can possess.
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Liabilities to Equity | Reasons:
- The ratio is very high in the 3rd year due to a fall in stakeholders’ equity along with a rise in the debt.
- The proportion of debt to the equity is high showing that the firm has high borrowings which can lead to a fall in its further debt raising capacity.
Actions
- Pay off some part of the debt so that the ratio at least confirms to the industry standard.
- Ensure that the liabilities to equity ratio is not too high as it adversely affects the debt raising and loan servicing capacity of the company.
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Equity | Reasons:
- Fall in equity ratio over the years may be due to increased reliance on debt and fall in the equity component.
- The equity ratio lower than the industry standard means that the competitors of this company have a greater reliance in equity than this company.
Actions
- The firm should increase the proportion of equity by raising more funds.
- The company can also reduce its debt component in order to improve the ratio.
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Interest Cover | Reasons:
- The company is making sufficient profits in order to cover its interest obligations.
- The company has a comfortable position with respect to interest payments.
Actions
- The company should maintain the current ratio as it also meets industry standards.
- If the company borrows more, it should ensure that the profits also rise reasonably so that the interest coverage ratio can be maintained at a similar level.
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Cash Flow to Debt | Reasons:
- The ratio has been negative in the first 2 years as the company has not been able to generate cash from operations.
- The low ratio shows the difficulty of the firm to payback its obligations.
Actions
- The company should improve its cash flow from operating activities so that it is able to generate enough cash for meeting day to day fund requirements.
- The company should try to be more consistent with respect to managing cash from operating activities.
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