improving profitability (1 Viewer)

[preciouspearl89]

Hey!

Could someone please help me with this queston. How oculd GIgabyte computer's improve their profitability?

Ajax Computers Ltd is considering making a takeover bid for a controlling block of shares in Gigabyte Computers Ltd. The financial report obtained from

Gigabyte Computers includes the following information:

• Return on owners’ equity has averaged 10% for the past two years (industry average is 15%).

• The accounts payable turnover period is 37 days (credit period is
21 days).

• Inventory turnover has increased from 27 days to 35 days in the last
12 months.

• Plant and equipment is valued at $1.75 million.

• The current ratio is 1.5 : 1 (industry average is 2.5 : 1).

Thanks.

 

[eskimoh]

the question is asking how profitability can be improved..

so you can either - increase sales OR reduce expenses and COGS which cut into initial sales and reduce profitability

im not going to write out a whole essay but just briefly, by looking at the financial info theyve given

• The accounts payable turnover period is more than the credit period which shows ineffeciency in collecting accounts payable. this is probably hindering their profits/inflow .. so by factoring accounts recievable.....or doing things to encourage payment by accounts recievable (ie. discounts for early payments, discounts for cash payments, allowing to pay in different methods ie EFTPOS or whatever), or discouraging late payments..... this will increase effeciency

• Inventory turnover has increased so they should probably invest less in inventory/stock. maybe adopt JIT inventory management? this will increase flexibility in correspondance with demand as well as reduce wastage or money that could be spent elsewhere. for example in marketing to increase overal sales.

• Plant and equipment is valued at $1.75 million. if some of this isnt necessary, they can liquidate these noncurrentassets and increase the working capital.. or use these funds in another aspect of the business

• The current ratio is 1.5 : 1 - fix this cos its under the industry avg!