Assessing Firms Health
Taking in consideration the following:
The collection period, (2) inventory turnover, (3) the amount of plant and Equipment and (4) the appropriate financial structure.
A -Automobile manufacturer: Relatively high plant and equipment which is expected due to the manufacturing characteristics of the business. The higher plant and equipment allow for higher long term debt as the assets can be more easily used as collateral.
Long collection period also is indicative for this industry as a result of the long collection period from the dealers.
B- Electric utility: Biggest clue is the low inventory as this is a service company, high property and plant, a good borrowing power because of the high property which is reflected in the high long term liabilities, high return on sales.
C- Supermarket chain: Higher inventory as supermarkets should offer wide varieties of goods. Have relatively low profitability but high asset utilization. Low collection period as most of goods are sold for retail and is immediately paid. High property and plant may be result of the buildings and fixtures. In addition high return on assets is a confirmation that this is a supermarket chain.
D-Japanese trading company: Most important indicator why D is a trading company is the long collection period as a result of using credit terms as competitive tool, combined with no property and plant. Also high inventory turnover is a characteristic of a trading company.
E- Aerospace manufacturer .The most indicative why E is an Aerospace manufacturer low inventory turnover, being a specialized product that is manufactured that requires high cost and long time to produce. Also high property and plant is an indication of manufactory facilities that this type of company should own. Large other liability is an indicator of possible customer advances, which are indicative