Example of credit analysis
1. In terms of the current ratio and the quick ratio, Asbil is more liquid than the average firm in their industry. Asbil has $2.63 in current asset relative to every $1 in current debt, compared to $2.5 in the average industry. And the firm has $1.64in cash and account receivables per $1 of current debt, compared to $1.35 for the industry average.
The company has days in account receivable of 84.23 days, compared to an industry norm of 62.9 days. Thus, Asbil collects its receivables much slower than the average industry, which indicates that the firm is less liquid than the average firm in the industry. Also, for Asbil, the days in inventory is 120.24 days, compared to 101.4 days in the industry. It appears that the firm carries excessive inventory. Additionally, the company pays its account payable much faster than the industry, with 49.84 days on average, compared to the industry of 75 days. Finally, Asbil has a cash conversion period of 154.62 days, while the average industry is 89.29 days. The difference is 65.33 days, indicates that Asbil will have to find financing the 65.33 days, while its competitors will not have to, leaving them a huge disadvantage. Therefore, after considering all these statistics, Asbil is less liquid than the average firms in the industry.
2. Asbil has an operating return on asset of 15%, while the average industry is 19.2%. Hence, we see that Asbil is not earning an equivalent return on assets to the average firms in their industry. In other words, the firm is not as profitable as competitions, and is not generating enough income on their assets. By looking at Asbil’s common sized income statement, we see that Asbil is doing well in managing its operating expenses, leading the industry average by 2%. However, what really kills Asbil that make them earning less profit compare to the industry is its cost of producing and selling their products (cost of goods sold). Asbil’s common sized COGS are 65%, compared to an industry norm
The company has days in account receivable of 84.23 days, compared to an industry norm of 62.9 days. Thus, Asbil collects its receivables much slower than the average industry, which indicates that the firm is less liquid than the average firm in the industry. Also, for Asbil, the days in inventory is 120.24 days, compared to 101.4 days in the industry. It appears that the firm carries excessive inventory. Additionally, the company pays its account payable much faster than the industry, with 49.84 days on average, compared to the industry of 75 days. Finally, Asbil has a cash conversion period of 154.62 days, while the average industry is 89.29 days. The difference is 65.33 days, indicates that Asbil will have to find financing the 65.33 days, while its competitors will not have to, leaving them a huge disadvantage. Therefore, after considering all these statistics, Asbil is less liquid than the average firms in the industry.
2. Asbil has an operating return on asset of 15%, while the average industry is 19.2%. Hence, we see that Asbil is not earning an equivalent return on assets to the average firms in their industry. In other words, the firm is not as profitable as competitions, and is not generating enough income on their assets. By looking at Asbil’s common sized income statement, we see that Asbil is doing well in managing its operating expenses, leading the industry average by 2%. However, what really kills Asbil that make them earning less profit compare to the industry is its cost of producing and selling their products (cost of goods sold). Asbil’s common sized COGS are 65%, compared to an industry norm