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Everlite`s Weaknesses:
O Everlite is not good in its expense control because it has a ProIit Margin
lower than that oI the Industry Average Ior ProIit Margin. The company
does not monitor its expenses extensively that because oI the great amount
oI expenses, the Net Income tends to be at a low range.
O Everlite does not utilize its assets well to generate sales. Its Total Asset
Turnover is again below the Industry Average and that shows that assets
were not used eIIectively to help the company gain sales. Thus, they have
low net incomes Irom 2007 to 2009.
Everlite`s Strengths:
O Everlite`s Iinancial statements and Iinancial ratios don`t give out its maior
strengths because oI the percentages and ratios which are Iar below the
industry average.
h)
When there will be a change in Accounts #eceivable, Sales will not be aIIected.
However, the collection period oI Accounts #eceivable or its DSO could aIIect the stock
price oI a company`s shares in the market. II Everlite was to lower it`s Average
Collection Period or its DSO (Day Sales Outstanding), it would have an increase in its
cash because oI the cash being Ireed. Because oI an addition to cash, Everlite will have
the capacity to repurchase some oI its stocks. It will also have the ability to invest the
cash Ior the company to expand. It could also be that the cash is to be used as payment oI
debts made by the company. All oI these possible actions would increase the stock price
oI Everlite`s shares in the current market.
i)
2007 0.322
2008 0.405
2009 0.439
The management should manage and overlook the increase in the company`s
inventory in a way that it should be less rapid than the increase in sales in order
Ior the company to have a lower inventory to sales ratio. Thus, there will be a
higher proIit and a higher stock price.
j)
II I am the credit manager, I will not continue to sell on credit rather than demand
cash on delivery even iI it might cause Everlite to stop buying Irom the company. II I`m
the bank loan oIIicer, I will demand its repayment. II you are a creditor, you will look on
the capacity oI the debtor iI he is able to pay the debt. The company may be able to pay
the debt but it was Iar beyond the due, which shows that they can hardly say their debt. It
is also shown in their ratio analysis that they have a high debt ratio that puts the company
in a risky situation. Thus, it is also risky Ior creditors to lend money in an unsure
company.
)
Some potential problems and limitations in using Iinancial ratio are as Iollows:
O #atio analysis is more useIul Ior narrowly Iocused Iirms than Ior multidivisional
ones.
O Attaining average perIormance is not necessarily good because most Iirms want
to be better than average. As a target Ior a high-level perIormance, it is best to
Iocus on the industry leaders` ratio.
O InIlation has distorted many Iirms` balance sheets. ThereIore, a ratio analysis Ior
one Iirm over time or a comparative analysis oI Iirms oI diIIerent ages must be
interpreted with care and iudgment.
O Seasonal Iactors can also distort a ratio analysis.
O Firms can employ 'Window Dressing (techniques employed by Iirms to make
their Iinancial statements look better than they really are).
O DiIIerent accounting practices can distort comparisons.
O It is diIIicult to generalize about whether a particular ratio is 'good or ' bad.
O Firms oIten have some ratios that look 'good and others that look 'bad, making
it diIIicult to tell whether the company is on balance, strong or weak.
)
Some qualitative Iactors that analysts should consider when evaluating a
company`s Iuture Iinancial perIormance are as Iollows:
O Are the company`s revenues tied to one key customer? II so, the company`s
perIormance may decline dramatically iI the customer goes elsewhere . On the
other hand, iI the customer has no alternative to the company`s product, this
might actually stabilizes sales.
O To what extent are the company`s revenues tied to one key product?
O To what extent does the company rely on a single supplier?
O What percentage oI the company`s business is generated overseas?
O How much competition does the Iirm Iace?
O Is it necessary Ior the company to continually invest in research and
development? II so, its Iuture prospects will depend critically on the success oI
new products in the pipeline and;
O Are changes in laws and regulations likely to have important implications Ior the
Iirm?