Review the Watson case using the following financial ratios in a trend analysis. Note that year 199x =1997, y=1998, and z = 1999. While sales growth is strong, this firm has some issues. Can you identify them? Recommend solutions?
Homework Answers
The sales are strong compared to the industry but the increase in sales is not converting into the profit.
As it can be clearly seen by a decrease in earnings per share
and profit margin ratios.
The decrease in profit margin is also affecting the return on asset
and return on equity.
Liquidity means the ability of the business to pay its short-term liabilities.
The company's liquidity ratio is also very poor and showing an alarming sign.
The company can fall into a debt trap. (Due to which it can cause the bankruptcy of the company). The company is unable to generate enough profit and it is borrowing more money in the form of debt which is very high above industry standard.
The companies debt to total assets that have increased by 10.48% from 1997 to 1999. Whereas industry debt to total assets that have increased by 2.10% from 1997 to 1999. It is almost 5 times more for Watson.
The company is facing it difficult to pay its interest on its debt. It can be clearly seen to buy a decrease in times to interest earned ratio.
The Watson also has very poor asset Management ratios. The average collection period has significantly increased compared to the industry.
Solutions:
1. To improve working Capital Management.
2. Increase the efficiency of the cash cycle and operating
cycle.
3. Reduce debt & don't go for new projects (or massive
expansion).
4. Concentrate on increasing profitability.
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