Note. We have used average stock here. When you have the information use it.
Profitability
Zeta has a higher gross margin than Omega. This may indicate a differing pricing policy. Omega’s net margin is lower than Zeta’s. Omega’s expenses are therefore proportionally higher. It should be noted that Omega’s bottom line profit is reduced significantly by the interest charge.
Return on Omega’s capital is around half of Zeta’s. Omega has a higher fixed asset base due in part to a revaluation. It may be that a revaluation of Zeta’s assets will partially close the gap.
Liquidity
Omega has nearly twice as many current assets as current liabilities. Although both companies’ quick ratios are much closer, Zeta’s liquidity does appear to be an issue especially as there is no cash at hand. It would be wise to examine projected cashflows to see how readily Zeta’s profits will improve this situation. As Zeta has no long-term loans they may be able to borrow in order to improve liquidity.
Working capital management
Zeta is turning stock over more quickly than Omega. This is beneficial in a market which can be subject to obsolescence.
Zeta’s creditor and debtor days are a cause for concern. Debtors should be collected within 60 days if not sooner. 60 day collection would improve cash flow by over £140,000 reducing the debtors balance to £658,000(60/73 ? £800,000).
Creditors should be paid at least as quickly as Omega pays theirs. Zeta risks damaging the goodwill it has with its suppliers. Paying creditors within 60 days would have an adverse effect on cash flow of over £270,000. The creditors balance would be £527,000 (60/91 *£800,000).
Omega is highly geared whereas Zeta has no long-term loans. Omega’s gearing means that should profits fall they may not be in a position to pay the loan interest. Zeta’s capital is entirely share capital and so a fixed return is not required.
Omega’s loan appears to be fixed rate. This means that in times of falling interest rates Omega will have higher interest costs than say, Zeta, if Zeta borrowed the same amount. The converse is true in times of rising interest rates.
Titany answered the question on
December 14, 2021 at 07:33