ADA University

School of Business

International MBA 2016

Holly Fashions
Ratio Analysis
Corporate Finance
COURSE CODE: FIN 502

Submitted to: Dr Omar Farooq

Submitted by: Rahimullah Amin

Submission Date: 3/5/2016

 Holly Fashions
Ratio Analysis
Answer One

Financial Ratios for the year 1993-1996 are bellow: -

A. Liquidity Ratios:- are used to determine a company's ability to pay off its short-terms debts

obligations.

Years 1993 1994 1995 1996

Current Ratio 3.8 3.7 3.4 3.6

Quick Ratio 2.4 2.4 1.6 2.0

B. Leverage Ratios: A leverage ratio is any one of several financial measurements that look at

how much capital comes in the form of debt (loans), or assesses the ability of a company to

meet financial obligations.

Years 1993 1994 1995 1996

Debt Ratio % 41.1 37.7 35.3 31.1
Time Interest Earned 8.0 8.5 11.6 15.7

C. Activity Ratios: Activity ratios are accounting ratios that measure a firm's ability to convert

different accounts within its balance sheets into cash or sales. Activity ratios are used to

measure the relative efficiency of a firm based on its use of its assets, leverage or other

such balance sheet items. These ratios are important in determining whether a company's

management is doing a good enough job of generating revenues, cash, etc. from its

resources.

Years 1993 1994 1995 1996

Inventory turnover 6.4 6.4 4.8 5.1

Fixed assets turnover 30.0 29.3 30.1 29

Total assets turnover 2.8 2.8 2.7 2.7

Average collection period 55 55 51 62.0

Days purchase outstanding 25 32 31 31.0

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 Holly Fashions
Ratio Analysis
D. Profitability Ratios:- Are used to assess a business's ability to generate earnings as

compared to its expenses and other relevant costs incurred during a specific period of time.

Years 1993 1994 1995 1996

Gross margin(%) 24 23.5 24.9 25

Net profit margin(%) 3 2.6 2.6 2.7

Return to equity(%) 14.3 11.6 10.8 10.7

Return to total assets (%) 8.4 7.2 7 7.3

Operating margin (% 6.8 6 6.1 5.9

Answer Two

Part a and b: - These are some important limitations of comparative financial ratios analysis that
analysts should be conscious of:

 Many large firms operate different divisions in different industries. For these companies it is
difficult to find a meaningful set of industry-average ratios.
 Ratios with large deviations from the norm only indicate symptoms of a problem. Additional
analysis is typically needed to isolate the causes of the problem; the fundamental point is:
ratio
 analysis merely directs attendance to potential area of concern, it doesn’t provide conclusive
evidence as to the existence of a problem.
 Inflation may have badly distorted a company's balance sheet. In this case, profits will also
be affected. Thus a ratio analysis of one company over time or a comparative analysis of
companies of different ages must be interpreted with judgment.
 Seasonal factors can also distort ratio analysis. Understanding seasonal factors that affect a
business can reduce the chance of misinterpretation. For example, a retailer's inventory may
be high in the summer in preparation for the back-to-school season. As a result, the
company's accounts payable will be high and its ROA low.
 Different accounting practices can distort comparisons even within the same company
(leasing versus buying equipment, LIFO versus FIFO, etc.).

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 Holly Fashions
Ratio Analysis
 It is difficult to generalize about whether a ratio is good or not. A high cash ratio in a historically
classified growth company may be interpreted as a good sign, but could also be seen as a
sign that the company is no longer a growth company and should command lower valuations.
 A company may have some good and some bad ratios, making it difficult to tell if it's a good
or weak company.

In general, ratio analysis conducted in a mechanical, unthinking manner is dangerous. On the other
hand, if used intelligently, ratio analysis can provide insightful information.

Answer Three

White’s reluctance to use much interest bearing debt has no effect and will not hurt the firm’s
profitability. The firm’s interest bearing debts measure the firm’s ability to make contractual interest
payment or to fulfill its interest obligations and has no relation to its profitability.

Answer Four

The Company is usually offered terms of 1\10, net 30, that is, the company’s one percent discount
if it is paid in within10 days and in any event full payment is expected within 30 days. White takes
these discounts he wants the liquidity or cash as soon as possible, in addition, the discount isn’t
especially generous and 99 % of the bill must be paid. The decision is considered a wise financial
move.

Answer Five

Book value per share for common stock:

$329,800\5000 share = $65.96 per share.

Market to book value ratio (MV\BV) = $55\65.06 =$ 0.833 per share.

65\65.96 = $0.985 per share

This mean that the investors are paying $0.833 to $0.985 for each $1 of book value of holly fashions
stocks.

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 Holly Fashions
Ratio Analysis

Answer Six

a. Hamilton thinks that the profitability of the firms to the owners has been hurt by White’s
reluctance to use much interest bearing debt.
b. Hamilton suspect that HF’s inventory is “excessive” and that “capital is unnecessarily tied
again inventory.
c. Hamilton thinks that white has been generous in granting payment extensions to customers,
and at one point nearly 40 percent of the company’s receivables were more than 90 days
overdue.
d. Hamilton wonders about the wisdom of passing up trade discount. HF is frequently offered
terms of 1\10, net 30. That is, the company receives a one percent discount if bill is paid in
10days and in any payment is expected within 30 days.

Answer Seven

a. White’s position in a large inventory is necessary to provide speedy delivery to customers.

he argues that their customers expect quick service and a large inventory to them to provide
that.
b. White has been generous in granting payment extensions to customers because he doesn’t
want to lose sales and that the rough time these retailers face is only temporary.
c. White rarely takes cash discount because he wants to hold onto their cash as long as
possible. Hamilton notes that the discount isn’t especially generous and 99 percent of the bill
must be paid.

Answer Eight

Looking at the comparison and analysis of the ratios with different years the Holly Fashions has
experienced a lots of ups and downs within four years. There is increase and decrease in all ratios
one can’t identify and realize any stable financial position, for example there is increase in inventory
turnover and the Average collection period has been extended almost to 62 which is more and is
not a good sign of sound Cash cycle and this can cause poor liquidity. On the other hand, the firm’s
interest bearing debts measure the firm’s ability to make contractual interest payment or to fulfill its

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 Holly Fashions
Ratio Analysis
interest obligations and has no relation to its profitability. White gave discount on the faster
repayment which will motivate the borrowers to pay their liabilities on time and fast which will help
them decrease the 62 days of collection and then they can pay the HF account payables.

Answer Nine

Part a: All the calculated ratios are based on Book value which are recorded in the books of the
firm.

Part a: - The calculations either to be book value or Market value depends on the firms Companies
with lots of machinery, like railroads, or lots of financial instruments, like banks, tend to have large
book values. In contrast, video game companies, fashion designers or trading firms may have little
or no book value because they are only as good as the people who work there. Book value is not
very useful in the latter case, but for companies with solid assets it's often the No.1 figure for
investors.

The following difference about the relationships between book value and market value can highlight
which one to apply:

1. Book Value Greater Than Market Value: The financial market values the company for less
than its stated value or net worth. When this is the case, it's usually because the market has
lost confidence in the ability of the company's assets to generate future profits and cash
flows. In other words, the market doesn't believe that the company is worth the value on its
books. Value investors often like to seek out companies in this category in hopes that the
market perception turns out to be incorrect. After all, the market is giving you the opportunity
to buy a business for less than its stated net worth.
2. Market Value Greater Than Book Value: The market assigns a higher value to the company
due to the earnings power of the company's assets. Nearly all consistently profitable
companies will have market values greater than book values.
3. Book Value Equals Market Value: The market sees no compelling reason to believe the
company's assets are better or worse than what is stated on the balance sheet.

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