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UNIT 3 - CASE ANALYSIS 1 QUESTION Dev Kadiwala November 1,2023
We need to thoroughly review Wizard Industries' accounting records and industry ratios before determining whether to offer them credit. Let's take a closer look at the review, step by step: 1. Financial Opportunities ➔ Profit margin - Over the past three years, Wizard Companies' revenue margin has grown, indicating a potential increase in the company's profitability. 2. Effectiveness ➔ Receivables Turnover: There has been a slight decrease in receivables turnover, from 4.3x to 4.3x. It suggests that receivables are taking a little longer to be collected, even if there is still a healthy turnover. ➔ Average collection duration: The average collection duration has increased dramatically from 58.3 days to 1.7%. There may be a credit risk because Wizard Industries has requested more money to be paid on its accounts. ➔ Inventory Turnover: From 1.6 to 1.1, there has been a drop in inventory turnover. A lower stock turnover rate can indicate that they have more inventory than they need, which could be dangerous. ➔ Capital Asset Turnover: The capital asset turnover ratio, which shows that assets have been employed effectively, remains constant at 4.3x. ➔ Current Ratio: From 1.6 to 1.1, the current rate has dropped. A current ratio below one should raise red flags because it may mean Wizard Industries won't be able to pay its bills on time. ➔ Although it is not provided, the quick ratio is an essential measure of short-term liquidity. Should the value be lower than 1.0, an issue would arise. 3. Liquidity ➔ Debt-to-Total-Assets Ratio: The increase in debt from 60% to 100% of total assets indicates a higher leverage ratio. This could become an issue if it keeps rising. ➔ Return on Investment or ROI - With an average return on assets (ROA) of 20.3%, the return on assets is excellent. ➔ Return on Equity (ROE): At 6.3x, the ROE suggests that shareholders are receiving a sufficient return.
4. A stable financial situation ➔ Interest Coverage (Amount Paid x Interest Earned): Wizard Industries' ability to pay for expenses is crucial to know, even though the amount of interest earned is kept private. 5. Trend Assessment ➔ Wizard Industries' financial performance during the preceding two years was higher in terms of both revenue and profit. Concern should be expressed about a few things, such as a notable increase in the average collection duration, a decrease in the current ratio, and rising debt levels. Recommendation:- ➔ Given the liquidity issues and the significant rise in the average collection time, it would be prudent to conduct additional research on Wizard Industries before extending loans. This could entail getting the most recent financial data, figuring out why the collection period was prolonged, and assessing the company's ability to pay off its debt. To reduce any risks, you might consider setting credit limits and terms of payment.
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