Financial Case Analysis - Ratio Analysis

Essay by xbirdiexUniversity, Bachelor's November 2006

download word file, 3 pages 4.7

The financial ratios used in this problem show that Bethesda Mining has some work ahead of them. There is substantial room for improvement for some of the ratios involved. A more thorough analysis would require ratio information from the mining industry as a whole but a small snapshot is provided below.

The current ratio is low. Bethesda Mining's current ratios over the two years given indicate negative net working capital. Insufficient cash to cover daily expenses is not an attractive position in any industry. One factor in particular that is decreasing the current ratio is accounts payable. This item is rather high and is affecting the company's short-term liquidity. On a bright note, the current ratio improved 22.3% year-to-year so focus appears to be in the correct place.

Removing inventory levels from the equation yields the quick ratio, which is significantly less than the current ratio for Bethesda Mining.

This decrease indicates that part of the problem may be tied into excessive inventory levels. This, coupled with the high accounts payable values, is damaging the current ratio. The quick ratio draws attention to this as its value is less than half that of the current ratio.

The cash ratio is a very straightforward calculation. In Bethesda Mining's case, it is clearly saying there is not enough cash relative to current liabilities. Taking the three ratios discussed so far into account, it could be theorized that Bethesda Mining is purchasing inventory at a higher level than sales are occurring. The accounts payable accounts (though decreasing in 2003) are still too high when compared to the available cash on hand.

The debt-equity, equity multiplier, and total debt ratios all lead to similar conclusions. Bethesda Mining is utilizing a nearly 50/50 debt-equity approach to fund assets. 2003 figures show that the firm...