Question

Suppose you are conducting an analysis of the financial performance of Blue Hamster Manufacturing Inc. 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.

	Ratios Calculated
	Year 1	Year 2	Year 3
Price-to-cash-flow	6.40	4.48	3.58
Inventory turnover	12.80	10.24	8.19
Debt-to-equity	0.50	0.40	0.32

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 Blue Hamster Manufacturing Inc.’s price-to-cash-flow ratio has decreased is that investors expect lower cash flow per share in the future.

Blue Hamster Manufacturing Inc.’s ability to meet its debt obligations has improved since its debt-to-equity ratio decreased from 0.50 to 0.32.

A decline in the inventory turnover ratio can be explained by the new inventory management system that the company recently adopted, which led to more efficient inventory management.

A decline in the inventory turnover ratio could likely be explained by operational difficulties that the company faced, which led to duplicate orders placed to vendors.

Answer 1

Answer

As per the given information about Blue Hamster Manufacturing Information, my opinion is as under-

1. All three ratios are declining year by year. The company has a history of operational difficulties. The company has adopted new forecasting strategies on pilot basis which resulted in better operational performance. Ratio shows that financial condition of the company is good enough.

2. From the decline of Debt to Equity Ratio we can understand that company has more debt than equity. The increased debt has fueled it's turnover and consequently operating cash flow. The company has reduced it's debt using cash available.

3. The declining Price to Cash Flow ratio indicates that the stock price is undervalued due to investor's expectation of reduced cash flow per share in future.

4. Since company has no efficient inventory management system, company's stock had increased due to duplicate POs. which consequently increased it's inventory turnover ratio. As mentioned above, the company has implemented more efficient inventory management system which resulted reduction in Inventory Turnover ratio.