Answer to Question #193403 in Accounting for sanaz

Question

Company ABC Ltd operates in the Health services sector and employs mainly contract doctors and nurses for subcontracting out to local hospitals.

You have used your skills acquired in BUS106 and have found that Health services sector averages for financial ratios/information are as follows:

Overheads = are generally high due to the high cost of employing medical professionals including doctors and surgeons

Operating margin = 40%

Net profit margin = 15%

Quick ratio = 2.5

On average entities in this sector have very little debt.

Required:

Company ABC has a current ratio of 0.5, a debt ratio of 65% and a net profit margin that is negative. Discuss the position and performance of Company ABC in no more than 250 words.

Answer 1

Solution:

A current ratio is a ratio that measures a company's ability to repay its short-term debts which are due within a period of one year.

ABC company has a current ratio of 0.5, which means that it has more short-term debts than its short-term assets. This means that the company doesn’t have enough liquid assets to meet its short-term liabilities. ABC company will, therefore, experience difficulties in meeting its short-term obligations.

 

The debt ratio is a financial ratio that measures the extent of a company’s leverage. It can be interpreted as the proportion of a company’s assets that are financed by debt. It is calculated by dividing a company’s total debts by its total assets.

ABC company has a debt ratio of 65%, which is considered poor and risky since there is a risk that the company will not be able to generate enough cash flow to service its debt.

 

A profit margin is a profitability ratio used to measure a company’s earnings or profits relative to its revenue.

ABC company has a negative profit margin, which means that the company is running in losses. It suggests that the company's revenue from selling its services or products is not enough to cover the cost of making or selling those products or services that cannot be sustainable in the long run.

 

ABC company's financial position and performance are in dire condition. It is not performing as expected and if things don’t change it may go into bankruptcy.