How do you know if this is too high or too low f

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How do you know if this is too high or too low? f) Suppose you observe that a firm with a ROA of 15%. How do you know whether the company is likely to be well managed? g) What can you infer from observing that a firm pays no dividends? h ) What can you infer from observing a firm whose sales per employee are decreasing over time? i ) What can you infer from observing a firm whose sales / assets are increasing over time? j) What can you infer from observing a firm whose book leverage is roughly constant over time but the fraction of total debt that is short term is increasing? k) What can you infer from observing a firm with a large cash-to-assets ratio? l) What can you infer from observing a firm whose current ratio is decreasing over time? m) What can you say about a firm’s operating and cash cycles if you observe that inventory turnover is not changing over time but the receivables turnover is decreasing and the payables turnover is increasing?
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COMM 370 – Elena Simintzi 12 Solutions to Question 5. a) With a lengthening cash cycle the firm’s short-term financial needs are increasing over time, and the firm needs to plan how these funds can be obtained. b) The collection period may be longer simply because the firm is offering better terms of credit to its customers (for example, giving them two months to pay instead of one). Or it could be that the firm itself is being less efficient in the collection, say because with a larger volume of sales the firm’s staff cannot follow its customers easily. But the more interesting case is when the firm’s credit policy and its efficiency in collecting its receivables remain unchanged. In this case, it is possible that customers are being unable to repay on time because they are facing financial trouble. c) A longer inventory period may be associated with a reduction in demand. When demand falls, firms accumulate inventory until they realize they need to cut production. d) The payables period can be longer if the firm obtains better terms of credit in its purchases from suppliers. But more generally, when firms in need of money but are constrained in the amount they can borrow from banks usually try to free up some cash by stretching their payables beyond their contractual agreements with the suppliers: delaying payment to suppliers is the same as borrowing from them. Alternatively, firms that usually paid cash for their purchases but now lack enough cash (possible because banks refuse to lend) may decide to take trade credit from suppliers, thus extending the payables period. Bottom line, a longer payables period may indicate that the firm is facing economic adversity and is no longer to borrow from banks, and thus is forced to rely on the more expensive trade credit offered by suppliers.
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  • Winter '12
  • VincentGregoire
  • Balance Sheet, Financial Ratio, Elena Simintzi

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