Question

Provide the following information for Gamestop (Accounting Case Study 1. Liquidity, Profitability and stock valuation. 2. Cash flow problems 3. Inventory Problems and ratios and debt obligation problems including debt equity ratios Please provide the following information stated above.

Answer 1

1) Liquidity: A buisiness firm is expected to have sufficient short term liquidity to meet out its current obligations that may arise from day to day operations. Most common ratios in this group are

Current Ratio- It is calculated by dividing current assets by current liabilities. As a convention rule current ratio of 2:1 is considered satisfactory.

Quick Ratio- It is calculated by dividing all liquid assets by Curent liabilities. A ratio of 1:1 is considered to be satisfactory. Liquid assets are currents assets apart from inventory and prepaid expenses.

Working Capital Turnover ratio- It is pbtained by dividing net sales by working capital employed in business.

Net Working Capital- It is obtained by subtracting current assets from current liabilities.

* Profitability: Maximisation of profits is one major goal of a business concern. A firm should earn profit not only to survive and grow in a competitive environment but also to enjoy the confidence of all interested parties such as creditors, shareholders employees.

Gross Profit Ratio= Gross Profit/ Net sales * 100%

Net Profit Ratio= Profit after Tax/ Net sales* 100%

Return on Investment= Profit before Interst and Tax/ Tangible Net Worth + Term Liability * 100%

Return on Equity= Profit after Tax/ Net worth * 100%

2) Cash flow Problems-

Cash flow problems are a major cause of business failure. The main problems are few of the below-

• Low Demand
• Continuous Loss
• Stock level is high
• Credit period allowed is higher

3) Inventory: Inventory Turnover ratio shows how many times the inventory rotates in a year. This ratio is very important from bankers view of appraising working capitak need. A high ratio suggests lower level of inventory as such probability of stock containing obsolete or unsaleable items. It also indicates better control and financial arrangement of firm. A lower rationmay be due to sluggish business ornpoor inventory control increasing the chance of obsolete or unsaleable stocks.

Inventory Turnover ratio= Cost of goods sold/ Average inventory

Inventory problems are described below:

• Increased level of demand
• Supply of stock is less due to inefficient workers
• No automation and use of obsolete machinery
• No performance management and indicators implied.

* Debt Equity Ratio: It is calculated by dividing long term liabilities by tangible net worth. Where tangible net worth is sum total of capital and reserves and surplus net of intangible assets. A lower ratio represent shigher stake of promoters in the business and looked upon favourably by the banker. The higher ratio speaks of firms larger dependence on outside ling term liabilities. A good business concerm tries to brinv down its debt equity ratuo more than 2:1.