Short-Term Liquidity of PVC Pipes Paper Example

Introduction

The current and quick ratios of PVC pipes are significant, and it shows that PVC can pay off its debts easily. The cash flow liquidity in 2015 decreased considerably to about half from 2014. Hence, the liquidity management of PVC improved in 2015vfrom the previous year. The decrease can be associated with a decline in Cash from operations (CFO), the cash balance and company securities. From 2014 into 2015, the cash conversion cycle was stable; however, the elements that constitute the conversion cycle were unstable. In 2015, the average collection period grew by seven days, the days outstanding increased by 14 days, the inventory days also increased by eight days, counteracting the adverse influence of the deteriorating collection period and the inventory turnover. Therefore, PVC requires to tighten up their credit policies and increase their oversight on the upcoming days on the inventory held. Moreover, it is pivotal that the company ensures that the number of days payable does not increase in the future since they may risk losing suppliers as well. Therefore, the short-term liquidity of PVC is adequate; it can meet liquidity requirements comfortably; however, the company needs to monitor the aspects mentioned. PVC pipes can meet its short-term financial obligations and subsequently to run its daily operations (Kamara, 2015).

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Operating Efficiency

The days payable outstanding, average collection period and days Inventory Held of PVC pipes indicate that the firm is less efficient. The total and fixed asset turnover ratios improved significantly resultant of the rise in sales or a reduction in fixed and total assets. Therefore, PVC pipes need to work their capital management strategies and net operating cycle. The firm needs to evaluate its capital management strategies since it is paying suppliers within 61 days earlier while they were collecting late, 65 days. Moreover, the day's inventory held significantly increased in 2015. This indicates that the company is slowly moving its products to the customers and goods stay at the store long before they are sold. Although PVC pipes had a higher Total Asset Turnover in 2015 compared to 2014, it is not an appropriate measure of operating efficiency since it is primarily based on various sorts of assets turn over at differing rates (Azeez, 2015).

Capital Structure and Long-Term Solvency

The capital structure of the company is much riskier considering its long term debts as well as the total debts. The long term debts significantly increased in 2015. Moreover, the total debt of 2015 is 67.1% relative to the total assets. The total and fixed assets, Debt ratio indicated that PVC pipes improved its leverage and it can adequately finance its operations with debt in 2015 compared to 2014. Furthermore, there is a decrease compared to 2014 in coverage ratios in cash and accrual. PVC pipes incurred losses in 2015 that caused a negative accrual-based ratio. A significant decline in the cash flow ratio, which has fallen below 1 for both years, furthermore, there is a decreasing cash interest coverage although it is still on the positive side. Considering the cash flow from operations, PVC pipes are unable to cover for its capital expenditures, payments of debts and dividends (Jorgensen, 2018). The risky capital structure and the level of losses incurred, PVC should devise a strategy that will focus on improving on the cash flow and reduce its debts, as well as a proper dividends strategy to improve the balance sheet of the firm.

Profitability

Several layers of profitability exist such as gross and operating profits and net income. The levels of profitability for the company is poor. There was a significant decline in the gross profit margin that was 10.1% in 2015. Without an adequate gross margin, PVC pipes will be unable to pay for its operating expenses. Generally, the company should have a stable profit margin unless they changed their business model. The cost of operations increased considerably and selling prices decreased. The company needs to monitor the cost of operations better or share the burden of increased cost to the consumers to increase their gross profit margin. An excellent operating profit margin shows how effective a firm can manage its expenses since it gives an outlook of the revenue returned after the inclusion of the company fixed and variable costs, excluding the tax and interests. Because of the financial leverage utilized by PVC pipes, its effect in 2015 is adverse while it was positive in the previous year. However, the company generates appositive cash from its operations. There was a decrease in cash flow margin and cash return on assets, however, they were still positive. An increase in the use of debts is possibly caused by a decrease in profit; hence, the long term solvency of the firm is adequate. Because of the high debts, PVC pipes cannot generate more operating income in 2015 compared to the previous year because of increased interest and tax burden. PVC pipes can opt to invest through loans by expanding their debts.

References

Azeez, A. (2015). Corporate governance and firm performance: evidence from Sri Lanka. Journal of Finance, 3(1), 180-189. DOI: 10.15640/jfbm.v3n1a16

Jorgensen, P. L. (2018). An analysis of the Solvency II regulatory framework's Smith-Wilson model for the term structure of risk-free interest rates. Journal of Banking & Finance, 97, 219-237. https://doi.org/10.1016/j.jbankfin.2018.10.001

Kamara, A. (2015). Short-Term Funding. Liquidity Management, 37-91. doi:10.1002/9781119087946.ch2