Receivables payables and inventories:

700

600

500

400
Receivables
300 Payables
inventory
200

100
inventory
0
Payables
2002
2001 Receivables
2000
1999
1998

Receivables:
The average collection period of the firm is known as average receivables .it means
in how much time debtors take to make payments. It is considered desirable to have
collection period close to industry benchmark.
Higher the ratio means a customers are delaying their payments and lower the ratio
means firm has tight credit policy.
In this case firm average receivable is 43 days as compared to 55 days of industry
average so the firm should make their credit policy more flexible.

Payables:
Age of payables means how much time firm is taking to make payments to their
creditors. The longer the time firm takes to make their payments it will negatively
 effects firm goodwill. In this scynerio firm is making their payments in around 33
days which is excellent.

Inventory:

Age of inventory means how much time firm is taking to clear its inventory. It is consider
desirable to have age of inventory closed to industry average. If inventory is too high it means
that too much of the firms capital is tied up in inventory which is not good and if the age is too
low it indicates that the firm has not enough stock which could hamper their sales. In this
scenario the industry average is 64 days whereas firm is keeping its inventory for 35 days
which is too low as compared to industry average the firm should increase their inventory so
that they can increase their sales and maximize their profit.

Liquidity:

Liquidity of a company is analyzed by keeping in view the two certain yet important
factors of accounting cycle i.e. current assets and current liabilities. The bottom line
is that the organization should be in a sound position to tackle the financial
obstacles which comes its way in the business world in any perspective.
Should be kept in careful consideration to maintain the current assets higher than
the current liabilities. We can elaborate it with the help of following ratios;

Current assets = 1:1 or 2:1

Current liabilities

The amount of current assets and current liabilities should either be similar or the
amount of current assets to be higher in order to consider the organization as a
going concern.
If its the opposite case at any point of time, the business exposes itself to financial
risks which eventually cause issues of survival in the ruthless current market.

Analysis;
Current Ratio:

Current assets
Current liabilities

Higher the ratio, the more likely company would be able to pay short-term bills. In the
scenario of Pejenca, current ratio is greater than 2 in all the years i.e. 2002- 1998. Therefore
the company would be able to pay all the short term bills conveniently.

Liquid ratio = current assets-inventory-prepaid expense/ current liabilities

The ratio is maximum in year 2000 which is 2.32 : 1 which is maximum as compared to
other years. The ratio is around 2:1 in each year which is good for the company as it can
pay it short term bills.

SOLVENCY

Solvency ratio measures from financial average and ability to meet its long term liability.

1) Debt equity ratio= long term debt/ (long term Debt+ Equity)

Increase and decrease in ratio suggest greater or lesser reliance on that source of financing.

Company debt equity ratio is less than one in each year which means that company is
dependent on long term debts.

And equity is more than debts. In year 2002 the ratio is maximum as compared to different
year which means that in this year company has more debts as compared to previous year.
Interest cover = PBIT/interest expense

The lower this ratio is the more likely it is that the firm will have difficulty meeting its debt
payments.

The ratio is increasing every year which is good sign for the firm as earning profit before
interest and tax is increasing every year and company will not face any difficulty paying
debt payments.

Profitabilty

Profitability ratio measures overall performance of the firm relative to revenues assets,
equity and capital.

Gross profit margin=gross profit/revenues

The lower the ratio the more concern the firm should be. Here the ratios are approx. 28%
every year which is good for the company as the ratio is good as compared to sales. The
firm can increase this ratio by raising the price of the product.

Net profit margin= net profit/ revenue

The lower the ratio the more concerned firm should be. The net profit margin should be
based on net income from continuing operation. In this case the net profit margin is
declining every year from 4.1% in 1998 to 2.59% in 2002. Firm should take care of their
operating expenses. Here the industry average is 2.1 % and firm net profit is above
industry average which is good sign for the company.
OPERATING PROFIT MARGIN

Operating income / revenue

This ratio is also referred to as PBIT margin. Again lower the ratio the firm should be more
concerned. The operating profit margin is always based on the operating income from this
continuing operation. And in this case operating profit is also declining every year.

Return on equity= net income/ total equity

The company started off well in year 1998 with 29.1%. After that firm return on equity
declined 15.2 % in 2002 which is not good sign for the company. As the ratio is too low as
accounting profit available to shareholder is declining every year. The ratio should be near
to industry average which is 23%. So the company does not able to fulfill its target from
since last three year.

Recommendations

Firm is good and net profitability ratio is good and firm do not have much debt and it is
able to clear its long term and short term debts easily. The only problem firm is facing that
they should increase their inventory which leads to increase in their sales and net income.

Shareholders get the more profit because increase in return equity and net income and he
should take the loan from the bank and they have to increase their inventory from that.

And sale is also good.