MGT201 GDB 1 Solution 2012

Ratio analysis

Learning Objective:

To understand the key decisive factor in working capital management with the help of liquidity ratios.

Learning Outcome:

After going through this GDB, the student will be able to recognize the importance of working capital management.

The Case:

Eco Tyre Ltd. (ETL) - incorporated in year 2003 and entered into automobile tyre manufacturing business by introducing a new tire manufacturing technology.  Over the years, ETL has been recognized as a tyre market leader. But, now a day, ETL is facing hard time due ineffective control of its working capital items.

Following data has been developed from its comparative balance sheets:

Ratio	FY 2010	FY 2011
Current Ratio	0.60 Times	0.79 Times
Quick Ratio	0.45 Times	0.61 Times
Return on Asset	9.7%	12.5%
Inventory Turnover	28 Times	15 Times
Avg. Collection Period	13 Days	24 Days
Short-term Debt	4 million	4 million
Total Asset Turnover Ratio	2 Times	5 Times
Credit Sales to Cash Sales Ratio	0.45 Times	0.67 Times

Required:

Being a financial analyst, do you think the liquidity of a company is satisfactory?

Support your answer with logical reasoning.

Important Instructions:

1.       Your discussion must be based on logical facts.

2.       The GDB will remain open for 3 working days/ 72 hours.

3.       Your answer should be relevant to the topic i.e. clear and concise.

4.       Your discussion should not exceed 60 words.

5.       Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.

6.       Obnoxious or ignoble answer should be strictly avoided.

7.       Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.

Ø       For detailed instructions, please see the GDB announcement.

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SOLUTION

In my point of view liquidity of Eco Tyre Ltd Company is satisfactory. Because Current ration and Quick ration is more then FY2010 and company easily bear the liabilities. Return on asset is also increase. Inventory turnover shows less liquidity of inventories. Average collection period is critical condition. It should be less as many for the liquidity of company.