Hbk Furniture Equipment Manufacturing Company Case Study

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Last Year

Forecast Year

=(2200+1900+1000-1900) / 1800

=1.77

=(3800+2300+400-2300) / (2500+1700)

=1

- This illustrate that the quick ratio has been declined from last year to forecast year from 1.77 to 1 slightly. The reasons for the decline can be increment of the stocks due to lack of sales. And also may be the organization is paying off their liabilities quickly without requesting more credit period. Cash balance has decreased. To overcome this situation the organization can sell the goods with the help of the marketing department by providing special discounts and promotions which can help to decrease the stocks and also the organization can negotiate with their suppliers and request more credit period.

3. Gearing Ratios

Gearing is a measurement of the entity’s financial leverage, which demonstrates the degree to which a firm’s activities are funded by owner’s funds versus creditor’s funds.

3.1Debt to equity ratio

The debt-to-equity ratio is a measure of the relationship between the capital contributed by creditors and the capital contributed by shareholders. It also shows the extent to which shareholders' equity can fulfill a company's obligations to creditors in the event of liquidation.

DER= Debt capital/Equity capital

Last year

Forecast year

=3400/15000

=0.23

=3400/16200

=0.21

- Gearing ratios are used to measure a firm’s long term solvency. In this company debt to equity ratio is not much difference in last year to forecast year. Debt capital is same in two year. Equity capital is slightly increased.

3.2Debt to total asset ratio

The debt to assets ratio indicates the proportion of a company's assets that are being financed with debt, rather than equity. The ratio is used to determine the financial risk of a business. A ratio greater than 1 shows that a considerable proportion of assets are being funded with debt, while a low ratio indicates that the bulk of asset funding is coming from equity.

Debt to total assets ratio = (Total assets – Total equity) /Total assets

Last year

Forecast year

=(20200 – 15000) / 20200

=0.25

= (23800 – 16200) / 23800

=0.31

- In forecast year Debt to total assets has increased by some points than last year. However this ratio is not much bad for company. With these numbers company can survive in the forecast year

4. Efficiency Ratio

The efficiency ratio is typically used to analyze how well a company uses its assets and liabilities internally. An efficiency ratio can calculate the turnover of receivables, the repayment of liabilities, the quantity and usage of equity, and the general use of inventory and machinery. This ratio can also be used to track and analyze the performance of commercial and investment banks. (myaccountingcourse)

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4.1Debtor turnover and collection days ratios

This ratio measures the number of times that the account receivable turned over a period of time. If the ratio is high then it indicates the time is shorter between making sale and collecting cash.

Debtor turnover ratio = Total credit sales / average debtors

Last year

Forecast year

= 18000/2200

=8.18

= 23000/3800

=6.05

Debt collection days = Average debtors /total credit sales *365

Last year

Forecast year

=(2200/18000) * 365

=44 Days

=(3800/23000) * 365

=60 Days

- Debt collection days have increased 44days to 60 days. This can be badly affected to the company. With the increase of the sales the debtors also have been increased, but as a negative impact the receivable time for the debt collection period is also has increased. The reason can be the management has not concerned more on tracking the debtors and collecting the dues. To overcome this situation the management can appoint new employees to track the debtors or they can provide additional discounts for the early payments to encourage the debtors.

4.2Payable turnover and payable payment day ratios

This ratio is used for calculate the account payable turned over during a period of time. These are the source of cash that remains during the credit period provided by the creditors or the suppliers.

Payable Turnover = Credit Purchases / Creditors

Last Year

Forecast Year

= 7000/1800

= 3.8

= 9200/2500

= 3.68

Payable payment days = (Average payables/Total credit purchases)*365

Last Year

Forecast Year

= (1800/7000)*365

= 93 Days

= (2500/9200) *365

=99 Days

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