Question 6.CS.3: Firm A

Fixed assets to net worth

• From 200V to 200Y it grew 91 percent.
• In 200Z it went way out of sight.
• Fixed assets actually fell from 200Y to 200Z, but net worth fell even more. (The effect ratios can highlight some of the effects of the drop in net worth.)
• The decrease in net worth has caused long-term liabilities to increase dramatically.
• A rise in fixed assets is not the problem.

Collection period

• Declines since 200X.
• Receivables are declining faster than credit sales.
• There is no real receivables problem for the firm.

Net sales to inventory

• Has increased since 200X.
• Inventory is declining faster than sales.
• Inventory is not a major problem for the firm.

Net sales to net worth (trading)

• Rises generally since 200V.
• Sales are actually declining, but net worth is declining even more.
• Costs are rising (particularly interest costs).
• This appears to be an overtrader, but overtrading is not the real problem.
• The problem is net worth. However, this company still has all of the problems of an
  overtrader.

Net profit to net sales

• Has declined since 200X.
• Decreasing sales and increasing interest costs are part of the reason.
• This is the real problem for Firm A.

Miscellaneous assets to net worth

• Has also increased, but once again, the problem is net worth.

Conclusion: Firm A has suffered major losses since 200Y. This has caused rising debt and a slight drop in liquidity. The losses have put the firm in an overtrading position.