Question

Do part of the financial analysis project. Using the correct financial ratios evaluate the company with regard to its short-term liquidity, long-term solvency and profitability. See pages 604 and 605 for which financial ratios should be used to evaluate each category. Your evaluation declare whether Key Tronic is: strong, above average, average, below average, weak, for each short-term liquidity, long-term solvency and profitability. Be sure to mention the financial ratio you are looking at in making this determination and it is great to mention the amount of the financial ratio compared to the industry average. Looking at the trend of Key Tronics financial ratios, be sure to mention if there is any category you believe to serious concern. Included on Moodle, I posted the analysis done by a former student Maddy. I found the layout of her analysis quite helpful. (Hint: you don't need to recount the history of each ratio over the years. Your principal work will be to compare the ratio to the industry average. Look at all the ratios which address that topic before making the evaluation.)

Answer 1

1) The short term Liquidity
The short term liquidity can be measured through current and quick ratio

Current ratio has been above industry average and is always closer to 2 , which shows that current assets are approximately twice the current liabilities ,which shows that company will not face any short term liquidity issues , but when we dive deeper then we use quick ratio i.e consider only very liquid assets such as cash and cash equivalents and not consider inventories then we can see the company face a serious problem of liquid cash ,most of cash is stocked in inventory ,  the quick ratio has been below industry average since 2015 , this company will faces difficulties while obligating there current liabilities and current liabilities are more than current liquid cash with the company , so the company's short term liquidity is below average

Also the inventory turnover is very low as compared to industry average which shows that there is lot of unwanted inventory with the company which hampers its current asset and current ratio . The company should try to reduce its inventory to meet industry expectations.

2 ) the long term solvency

Debt to Equity ratio and times interest earned can be used to get the idea about the long term solvency of the company , so the debt to equity shows that company's debt had increased over the past few years from being close to industry average in 2014 , it became almost double in 2015 , the company is trying to reduce its debt , which can be interpreted by observing that the ratio is declining and coming close to 1 , Higher debt to equity shows that there are more creditors for the company then investors which can affect future investments , also its shows that company is highly leveraged and risky , a low ratio assures that firm is financially secure .

Next ratio to analyse solvency is times interest earned which is basically net income before interest/ interest expense
So the higher ratio is preferred , since 2015 , the ratio is half of the industry average which shows that interest expense is too much when compared to net income and in 2019 it had become worse , there was net loss that's why ratio become negative , it shows companies interest payment way more than it ability to fulfill them.
These ratio prove the companies long term solvency as week

3. Profitability ratio

These ratio include Return on Assets , Return on Equity , Return On sales ( Profit Margin )
The return on assets is nowhere close to industry average and have become negative in 2018 , which means there is a net loss after this year , which means business in not profitable
Also Return on Assets is also negative after 2018 , which means assets are not adequately used to produce returns for the company , which means return does not justify the returns with the company
Return on Equity is also negative after 2018 and have been nowhere close to industry average ,there is a net loss in 2018 and it has increased tremendously in 2019 , the equity i.e shareholders money is used to produce loss rather than profit , so there is no profitability in the company i.e the profitability of the company is weak