Question

Suppose you are conducting an analysis of the financial performance of Cute Camel Woodcraft Company over the past three years. The company did not issue new shares during these three years and has faced some operational difficulties. The company has thus pilot tested some new forecasting strategies for better operations management. You have collected the company's relevant financial data, made reasonable assumptions based on the information available, and calculated the following ratios. Price-to-cash-flow Inventory turnover Debt-to-equity Ratios Calculated Year 1 Year 2 Year 3 6.00 7.80 8 .74 12.00 14.40 16.13 0.30 0.32 0.38 Based on the preceding information, your calculations, and your assumptions, which of the following statements can be included in your analysis report? Check all that apply. A plausible reason why Cute Camel Woodcraft Company's price-to-cash-flow ratio has increased is that investors expect higher cash flow per share in the future. An improvement in the inventory turnover ratio could likely be explained by the new sales-forecasting strategies that led to better inventory management. The company's creditworthiness has improved over these three years as evidenced by the increase in its debt-to-equity ratio over time. Cute Camel Woodcraft Company's ability to meet its debt obligations has worsened since its debt-to-equity ratio increased from 0.30 to 0.38.

Answer 1

As the price to cash flow had increased from year 1 to year 3, it could be mainly due increase in future cash flows increasing the price per share.

So 1) is correct

Using better sales forecasting strategies could improve the inventory management leading to better inventory turnover ratio.

So 2) is correct

If Debt to Equity ratio had increased over the years, it means that the debt burden or relative debt had increased. This is a sign of weakening credit worthiness.

So 3) is not correct

The ability to meet Debt obligation is given by coverage ratios and unless the profit and interest figures are provided, the ability cannot be measured.

So 4) is Not correct