Furniture Factory, Inc., is a world-wide industry leader in the office furniture manufacturing industry. Use the following ratio table to answer the next three questions. FFI 2003 FFI 2004 FFI 2005 FFI 2006 Industry 2006 Current Asset 1.5 1.4 1.1 1.0 2.1 Industry Avg 2006 Quick 1.2 1.2 0.9 0.9 0.9 Industry Avg 2006 Inventory Turnover 12.9 17.8 22.3 33.1 6.2 Industry Avg 2006 Times Interest Earned (TIE) 9.5 16.3 27.3 30.7 5.6 Industry Avg 2006 Debt to Equity (D/E) 1.3 1.6 2.4 2.6 1.5 Industry Avg 2006 Which of the following interpretations of ratio analysis is most accurate? A) Furniture Factory, Inc., has a higher credit risk than the average company in the industry based on the D/E ratio. B) The liquidity position of Furniture Factory, Inc., has been steadily improving. C) The leverage position of Furniture Factory, Inc., has been steadily improving. D) Furniture Factory, Inc., has a higher credit risk than the average company in the industry based on the times interest earned ratio. -------------------------------------------------------------------------------- Which of the following statements describes the most likely interpretation of the liquidity position of Furniture Factory, Inc? Furniture Factory, Inc., has: A) managed their inventory more efficiently than the industry. B) a serious liquidity problem compared to the industry. C) difficulty meeting short-term obligations. D) continuously improved their leverage position compared to the industry. -------------------------------------------------------------------------------- Based on the ratio analysis table for Furniture Factory, Inc., complete the following statement. Creditors would most likely: A) not consider lending more money to Furniture Factory, Inc., due to the significant problems that are apparent with both liquidity and leverage. B) require additional information to explain the apparent contradictions in the liquidity and leverage ratios. C) be willing to lend more money to Furniture Factory, Inc., without any reservations. D) downgrade the credit quality of Furniture Factory, Inc., and increase the amount of interest charged to cover the increasing default risk.
AA The third one is a little tricky to me… I’d go with B. It could be C also, but their liquidity position is deteriorating but still not in dangerous territory.
A B D I should probably know these better, I was studying Fixed Income a good chunk of yesterday
Furniture Factory, Inc., is a world-wide industry leader in the office furniture manufacturing industry. Use the following ratio table to answer the next three questions. FFI 2003 FFI 2004 FFI 2005 FFI 2006 Industry 2006 Current Asset 1.5 1.4 1.1 1.0 2.1 Quick 1.2 1.2 0.9 0.9 0.9 Inventory Turnover 12.9 17.8 22.3 33.1 6.2 Times Interest Earned (TIE) 9.5 16.3 27.3 30.7 5.6 Debt to Equity (D/E) 1.3 1.6 2.4 2.6 1.5 Which of the following interpretations of ratio analysis is most accurate? A) Furniture Factory, Inc., has a higher credit risk than the average company in the industry based on the D/E ratio. B) The liquidity position of Furniture Factory, Inc., has been steadily improving. C) The leverage position of Furniture Factory, Inc., has been steadily improving. D) Furniture Factory, Inc., has a higher credit risk than the average company in the industry based on the times interest earned ratio. Your answer: A was correct! Furniture Factory, Inc., has a higher credit risk than the average company in the industry based on the D/E ratio. The total amount of debt to equity has steadily increased over the past few years. Currently Furniture Factory, Inc., has almost twice the level of total D/E as the industry average. ________________________________________ Which of the following statements describes the most likely interpretation of the liquidity position of Furniture Factory, Inc? Furniture Factory, Inc., has: A) managed their inventory more efficiently than the industry. B) a serious liquidity problem compared to the industry. C) difficulty meeting short-term obligations. D) continuously improved their leverage position compared to the industry. Your answer: A was correct! Furniture Factory, Inc., manages their inventory more efficiently than the industry. This is most obvious by comparing the inventory turnover ratio to the industry. The inventory turnover ratio is computed by dividing cost of goods sold by the average inventory. Therefore, the higher the turnover ratio the more efficient the company is in managing inventory. Comparing the current asset and quick ratio also reflects a low level of inventory for the company. The quick ratio is right in line with industry average, while the current ratio is much higher for the industry. However, this is to be expected if a company is very efficient in managing their inventory. The company does not appear to have a serious liquidity or leverage problem. While the total amount of debt to equity is increasing, the times interest earned ratio is improving and provides adequate cushion for debt obligations. ________________________________________ Based on the ratio analysis table for Furniture Factory, Inc., complete the following statement. Creditors would most likely: A) not consider lending more money to Furniture Factory, Inc., due to the significant problems that are apparent with both liquidity and leverage. B) require additional information to explain the apparent contradictions in the liquidity and leverage ratios. C) be willing to lend more money to Furniture Factory, Inc., without any reservations. D) downgrade the credit quality of Furniture Factory, Inc., and increase the amount of interest charged to cover the increasing default risk. Your answer: B was correct! Creditors would recognize the efficient inventory management as a strength for the company and would not be overly concerned with the liquidity position of the company. They would probably be more concerned about the increasing amount of total debt to equity as compared to the industry. However, the times interest coverage ratio indicates the company has adequate cash flow coverage to meet their debt obligations. There is no indication of loan covenants being violated that would warrant an increase in the interest rate charged.
not good.
A - Confident A - Larger values of inventory turnover indicate smaller number of inventory days, which means the company is using its inventory efficiently. A - Not very sure. But the current and quick ratio are less than the average which indicate liquidity risk and from 1 there are credit risk as well. Comments and suggestions are welcomed.
Nice!!! Good way to start off my day… Still laying in bed, pull open the laptop to a refreshing credit analysis question and nail it!
LanceTX Wrote: ------------------------------------------------------- > AA > The third one is a little tricky to me… I’d go > with B. It could be C also, but their liquidity > position is deteriorating but still not in > dangerous territory. Nice work Lance.
Why can’t the 2nd answer be C? They have a quick ratio of 0.9 which means they could only meet all their current liabilities by selling some inventory isn;t this a good definition of having difficuklty to meet short-term obligations? I accept it’s in line with the industry average but that doesn’t mean they don’t have an issue.
Hurricane Wrote: ------------------------------------------------------- > Why can’t the 2nd answer be C? > > They have a quick ratio of 0.9 which means they > could only meet all their current liabilities by > selling some inventory isn;t this a good > definition of having difficuklty to meet > short-term obligations? I accept it’s in line > with the industry average but that doesn’t mean > they don’t have an issue. Meeting their short tem obligations is a function of the coverage ratios, which in this case a very good.
Sorry to be really dumb here but the coverage ratio is 0.9x which isn’t good (let alone very). I understand they can meet the interest (assuming profits translate to cash) but to meet all their current liabilities they need to sell some inventory and even when they do this they still have a current ratio of only 1 times. Surely by definition this is a sign they may have difficulty meeting their short term obligations? Great, another section to add to the growing list of must review topics. I’m going backwards.
The times interest earned is the coverage ratio. Meaning they are covering their interest expense 30x per year. ie With their current level of EBIT, they could pay their interest expense 30 more times. Current ratio and quick ratio are both liquidity ratios, NOT coverage ratios. A company would only need to sell inventory and other current assets to cover liabilities if they couldn’t do so with current earnings.
Bingo.
Thanks