A company has the following ratios: Current ratio: 2.1 to 1.0

Accounts receivable turnover ratio. 350 to 1 Debt/ equity ratio. 20.0 to 1 Interest coverage ratio 7.0 to 1 Inventory turnover ratio 9.0 to 1 The industry averages are: A company has the following ratios: Current ratio: 4.1 to 1.0 Accounts receivable turnover ratio. 8 to 1 Debt/ equity ratio. 4.0 to 1 Interest coverage ratio 9.0 to 1 Inventory turnover ratio 8.0 to 1. Based on the above items, please compare and contrast the ratios between the company and the industry.

Required:
Analyze reasons why there could be differences and the overall financial position of the company. Also, what of the ways the company could finance the company without significant negative changes to the above financial metrics (ratios)?

The company has current ratio almost half than the industry average. This is an indication that the company has lesser current assets than industry average. The ability of the company to meet its short term obligations is not suitable as the other companies in the industry are maintaining double current ratio. The ratio should never go below 1 as if it does the company may face its operational financing and working capital management issues.

The debt to equity ratio is significantly higher than the other companies of the same industry. The industry average is 4 whereas the company has ratio 20. This is significantly higher which indicates that there is heavy burden of debt on the company.  High debt/ equity ratio indicates high risks. Investors avoid investing in such companies which have high debt/ equity ratio.

Explanation:

The company can go for equity financing as it will also help reduce its debt / equity ratio. The company will become less riskier and financing will be divided in debt and equity. The debt burden on assets will be reduced. There can be reduction in certain debt covenants. The company can use equity financing to fund its operations as well as purchase of non current assets to increase production and ultimately profitability of the company could rise.

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