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ADA University School of Business International MBA 2016 Holly Fashions Ratio Analysis Corporate Finance COURSE CODE: FIN 502 Submitted to: Dr Omar Farooq Submitted by: Rahimullah Amin Submission Date: 3/5/2016 Holly Fashions Ratio Analysis Answer One Financial Ratios for the year 1993-1996 are bell...

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ADA University School of Business International MBA 2016

Holly Fashions Ratio Analysis Corporate Finance COURSE CODE: FIN 502

Submitted to: Dr Omar Farooq Submitted by: Rahimullah Amin Submission Date: 3/5/2016

Holly Fashions Ratio Analysis Answer One Financial Ratios for the year 1993-1996 are bellow: A. Liquidity Ratios:- are used to determine a company's ability to pay off its short-terms debts obligations. Years Current Ratio Quick Ratio

1993 3.8

1994 3.7

1995 3.4

1996 3.6

2.4

2.4

1.6

2.0

B. Leverage Ratios: A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a company to meet financial obligations. Years Debt Ratio % Time Interest Earned

1993 41.1

1994 37.7

1995 35.3

1996 31.1

8.0

8.5

11.6

15.7

C. Activity Ratios: Activity ratios are accounting ratios that measure a firm's ability to convert different accounts within its balance sheets into cash or sales. Activity ratios are used to measure the relative efficiency of a firm based on its use of its assets, leverage or other such balance sheet items. These ratios are important in determining whether a company's management is doing a good enough job of generating revenues, cash, etc. from its resources. Years Inventory turnover

1993 6.4

1994 6.4

1995 4.8

1996 5.1

Fixed assets turnover

30.0

29.3

30.1

29

Total assets turnover

2.8

2.8

2.7

2.7

Average collection period

55

55

51

62.0

Days purchase outstanding

25

32

31

31.0

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Holly Fashions Ratio Analysis D. Profitability Ratios:- Are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. Years

1993 24

1994 23.5

1995 24.9

1996 25

Net profit margin(%)

3

2.6

2.6

2.7

Return to equity(%)

14.3

11.6

10.8

10.7

Return to total assets (%)

8.4

7.2

7

7.3

Operating margin (%

6.8

6

6.1

5.9

Gross margin(%)

Answer Two Part a and b: - These are some important limitations of comparative financial ratios analysis that analysts should be conscious of:  

Many large firms operate different divisions in different industries. For these companies it is difficult to find a meaningful set of industry-average ratios. Ratios with large deviations from the norm only indicate symptoms of a problem. Additional analysis is typically needed to isolate the causes of the problem; the fundamental point is:

 

ratio analysis merely directs attendance to potential area of concern, it doesn’t provide conclusive evidence as to the existence of a problem. Inflation may have badly distorted a company's balance sheet. In this case, profits will also be affected. Thus a ratio analysis of one company over time or a comparative analysis of



companies of different ages must be interpreted with judgment. Seasonal factors can also distort ratio analysis. Understanding seasonal factors that affect a business can reduce the chance of misinterpretation. For example, a retailer's inventory may be high in the summer in preparation for the back-to-school season. As a result, the



company's accounts payable will be high and its ROA low. Different accounting practices can distort comparisons even within the same company (leasing versus buying equipment, LIFO versus FIFO, etc.).

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

Holly Fashions Ratio Analysis It is difficult to generalize about whether a ratio is good or not. A high cash ratio in a historically classified growth company may be interpreted as a good sign, but could also be seen as a



sign that the company is no longer a growth company and should command lower valuations. A company may have some good and some bad ratios, making it difficult to tell if it's a good or weak company.

In general, ratio analysis conducted in a mechanical, unthinking manner is dangerous. On the other hand, if used intelligently, ratio analysis can provide insightful information.

Answer Three White’s reluctance to use much interest bearing debt has no effect and will not hurt the firm’s profitability. The firm’s interest bearing debts measure the firm’s ability to make contractual interest payment or to fulfill its interest obligations and has no relation to its profitability.

Answer Four The Company is usually offered terms of 1\10, net 30, that is, the company’s one percent discount if it is paid in within10 days and in any event full payment is expected within 30 days. White takes these discounts he wants the liquidity or cash as soon as possible, in addition, the discount isn’t especially generous and 99 % of the bill must be paid. The decision is considered a wise financial move.

Answer Five Book value per share for common stock: $329,800\5000 share = $65.96 per share. Market to book value ratio (MV\BV) = $55\65.06 =$ 0.833 per share. 65\65.96 = $0.985 per share This mean that the investors are paying $0.833 to $0.985 for each $1 of book value of holly fashions stocks.

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Holly Fashions Ratio Analysis

Answer Six a. Hamilton thinks that the profitability of the firms to the owners has been hurt by White’s reluctance to use much interest bearing debt. b. Hamilton suspect that HF’s inventory is excessive and that capital is unnecessarily tied again inventory. c. Hamilton thinks that white has been generous in granting payment extensions to customers, and at one point nearly 40 percent of the company’s receivables were more than 90 days overdue. d. Hamilton wonders about the wisdom of passing up trade discount. HF is frequently offered terms of 1\10, net 30. That is, the company receives a one percent discount if bill is paid in 10days and in any payment is expected within 30 days.

Answer Seven a. White’s position in a large inventory is necessary to provide speedy delivery to customers. he argues that their customers expect quick service and a large inventory to them to provide that. b. White has been generous in granting payment extensions to customers because he doesn’t want to lose sales and that the rough time these retailers face is only temporary. c. White rarely takes cash discount because he wants to hold onto their cash as long as possible. Hamilton notes that the discount isn’t especially generous and 99 percent of the bill must be paid.

Answer Eight Looking at the comparison and analysis of the ratios with different years the Holly Fashions has experienced a lots of ups and downs within four years. There is increase and decrease in all ratios one can’t identify and realize any stable financial position, for example there is increase in inventory turnover and the Average collection period has been extended almost to 62 which is more and is not a good sign of sound Cash cycle and this can cause poor liquidity. On the other hand, the firm’s interest bearing debts measure the firm’s ability to make contractual interest payment or to fulfill its

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Holly Fashions Ratio Analysis interest obligations and has no relation to its profitability. White gave discount on the faster repayment which will motivate the borrowers to pay their liabilities on time and fast which will help them decrease the 62 days of collection and then they can pay the HF account payables.

Answer Nine Part a: All the calculated ratios are based on Book value which are recorded in the books of the firm. Part a: - The calculations either to be book value or Market value depends on the firms Companies with lots of machinery, like railroads, or lots of financial instruments, like banks, tend to have large book values. In contrast, video game companies, fashion designers or trading firms may have little or no book value because they are only as good as the people who work there. Book value is not very useful in the latter case, but for companies with solid assets it's often the No.1 figure for investors. The following difference about the relationships between book value and market value can highlight which one to apply: 1. Book Value Greater Than Market Value: The financial market values the company for less than its stated value or net worth. When this is the case, it's usually because the market has lost confidence in the ability of the company's assets to generate future profits and cash flows. In other words, the market doesn't believe that the company is worth the value on its books. Value investors often like to seek out companies in this category in hopes that the market perception turns out to be incorrect. After all, the market is giving you the opportunity to buy a business for less than its stated net worth. 2. Market Value Greater Than Book Value: The market assigns a higher value to the company due to the earnings power of the company's assets. Nearly all consistently profitable companies will have market values greater than book values. 3. Book Value Equals Market Value: The market sees no compelling reason to believe the company's assets are better or worse than what is stated on the balance sheet.

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