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(solution) Plush Carpet Mills Case Study

Plush Carpet Mills Case Study 1. Look at the current ratio and the quick (acid-test) ratio of PCM. What trends do you notice over 2012 - 14, and what does this suggest about PCM’s liquidity? How does PCM’s liquidity in 2014 compare with the industry average? Both of the current ratio and quick ratio are decreasing. Over the period of three years, current ratio is in a falling trend indicating the liquidity of the company has decrease throughout the years. The industry average is 1.6 and the current ratio for the year 2014 is 1.53 which is around the industry average. 2. Now study the accounts receivables turnover, average collection period, inventory turnover, and average days of inventory for PCM. What do these patterns suggest about the firm’s conversion of accounts receivable and inventories to cash? A high turnover means higher sales and lower turnover inventory means more goods in the stores. Besides, it indicates more storage costs are incurred for maintaining the inventory. The inventory turnover is in falling trend showing the demand for the goods produced by the firm has decreased over the period concerned. A high accounts receivable shows firm is efficient in collecting payments from debtors and a low turnover tells the story of working capital blocked in receivables. The firm has seen inefficiency in managing debtors indicated by a falling trend in receivable turnover. 3. Considering your answers to the two questions above, what is your overall assessment of PCM’s liquidity position? What two major factors account for your assessment? An overall assessment about the firm's liquidity would be: a.The current ratio, accounts receivable turnover and inventory turnover are all in a falling trend considering firm specific financials. However the firm has reported current ratio for the year 2014, in line with industry and inventory turnover above industry average. Only receivable turnover is below industry. This means there is inflationary. Hence the firm has decided to offer flexible and extended credit period when compared with industry so that the demand of goods can be maintained in a certain level. b. The Liquidity of the firm is in a considerable position as the entire industry seems to suffer due to falling purchasing power of customers. 4. What is your assessment of the manner in which PCM is managing its assets? Pay attention to both trends and industry averages. Asset turnover indicates of the efficiency of the firm with which the firm can use its fixed assets to generate revenue. The firm could not effectively use its assets to generate revenue indicated by falling trend over the years under concern. However the firm has reported asset turnover for the year 2014, in line with industry: it indicates the near efficiency standards for the year they said. The return on asset also indicates the efficiency of the company in management of its assets. It is a description of the return earned from each dollar invested in the fixed assets used to carry on its business. This ratio for the firm shows the increasing trend, and for the current year the firm is even better than industry averages. 5. What is your assessment of the manner in which PCM is financing its assets? Pay attention to both trends and industry averages. What is the relationship between the debt to equity ratio and times interest earned as these relate to PCM? And is there any other possible explanation (outside of the firm’s financial statements) for the observed trend in times interest earned? Relationship between D/E ratio and times interest earned ratio: The increase in D/E ratio the times interest ratio is decreasing. This means increase in debt content in capital, the interest cost is increasing ,but the earnings is not increasing to that level that times interest ratio is falling. 6. What can you say about PCM’s gross profit ratio and net profit ratio? Explain any patterns observed. The operating margin of the PCM is increasing, but for the year it is still under industry average. The net profit margin for the firm is also increasing and for the year it is even more than the industry average. It means that the operating expenses incurred by the firm are above industry standards but the interest and taxes are in controlled stage. 7. How are PCM’s net profit ratio, and asset turnover ratio affecting the firm’s pre-tax return on assets (ROA) and return on equity (ROE)? What is your overall assessment of the firm’s profitability, including its earnings per share (EPS)? The relationship between return on asset, net profit margin and total asset turnover is that : Return on assets= net profit times total assets turnover Total debt ratio = debt/total assets This means there is an increase in debt and return on assets, the return on equity will increase because the trading on equity . 8. Referring to PCM’s statement of cash flow for 2013 and 2014, assess PCM’s cash flow situation noting both inflows and outflows? The company has raised additional long term debt and has do the expansion both its operating and investing activities for the year compared to the previous year. This is a sign of growth and available of profit opportunities to the company. The company keeps a policy of dividend payout to keep the shareholders compete for the returns indicated by increase in dividend. 9. Based on your answers to the questions above, what is your overall evaluation of PCM’s financial condition? (Pull all your analysis together in answering this question.) Overall, the firm is above the industry average, by considering majority of results on ratio analysis were above or in line with industry averages. Also, though a decreasing financial scenario when considered on independent part, but the company has a positive scenario in industry for the current year. 10. What is the market’s assessment of PCM’s financial condition? Explain. Does the market’s assessment confirm or refute your analysis? PCM when assessed will have a positive picture scenario due to overall ratio analysis. 11. Based on your evaluation of PCM and the market’s assessment of the firm, would you accept employment with the company? Explain. I would accept employment with the company, since the market assessment and my evaluation would suggest a not that strong positive financial scenario for the year 2014


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Sep 13, 2020





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