Financial ratio data is listed below for Gallery of Dreams. Construct a list of strengths and weaknesses for the firm after analyzing the ratios

Gallery of Dreams
Ratios

Ratio Industry 2015 2014 2013

Current 2.50x 4.48x 4.06x 3.48x
Quick 0.80x 1.47x 1.18x 0.96x
Average collection period 11 days 16 days 15 days 9 days
Inventory turnover 2.30x 1.19x 1.24x 1.37x
Days payable outstanding 15 days 11 days 12 days 8 days
Fixed asset turnover 17.50x 9.74x 9.09x 8.85x
Total asset turnover 2.80x 1.50x 1.67x 1.82x
Debt ratio 62.00% 29.47% 34.04% 39.17%
Long term debt to
total capitalization
25.53%
14.09%
18.91%
22.33%
Times interest earned 9.93x 22.02x 19.00x 14.23x
Fixed charge coverage 8.69x 4.59x 4.47x 4.25x
Gross profit margin 31.10% 59.21% 59.39% 58.52%
Operating profit margin 8.06% 22.05% 21.86% 20.52%
Net profit margin 4.32% 11.89% 11.00% 10.97%
Return on investment 9.21% 17.97% 18.28% 18.35%
Return on equity 11.34% 24.14% 27.51% 29.88%

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What will be an ideal response?

Strengths:
• Current and quick ratios are above industry average and increasing
• Accounts payable are paid in a timely manner
• Overall debt has declined significantly and is well below the industry average
• Interest is covered by profits as are lease payments and the number of times covered has increased each year
• Profitability is excellent with gross, operating and net profit margins above industry average and increasing all years with the exception of gross profit margin which decreased slightly in 2015

Weaknesses:
• The average collection period is increasing and is now above industry average
• Inventory turnover is below industry average and is extremely low indicating the firm does not move inventory well
• Fixed asset turnover, while increasing, is still below industry average
• Total asset turnover is decreasing which implies sales are declining and/or investments in assets are too high relative to sales
• Fixed charge coverage is below industry average and implies that the firm has significant operating leases
• Return on investment is declining due to significant investment in assets
• Return on equity is declining, but this is also positive as it is partially due to the significant decline in debt