Financial ratios Analysis of al karam and gul ahmed
Trend for net profit margin is fluctuating. No smooth pattern can be observed. However Alkaram never made loss whereas Gul Ahmed faced the situation in 2012.
Current ratios which shows the ability of the firm to pay its short term debts by current assets seems better for Alkaram as it is always above 1. Both operate in cloth market and their suppliers might not wait for a longer period for them to pay.
Gul Ahmed may de-motivate its suppliers if payments are not made on time. Acid test ratio is quite low for both companies which show a major part of current assets are stock in trade. This reduces the firm’s ability to pay its debts. However Alkaram is doing better than Gul Ahmed and actual comments could be made by comparing the ratios with industry average.
Inventory turnover is better for Alkaram in all years but it significantly fell in the last year. It might be due to excess stock piled up maybe to catch cost advantage for the period as there might be a significant expected rise in raw material prices.
Alkaram usually sells its products much faster than the inventory it piles up. Gul Ahmed might have tightened up its policies for credit it offers to the market as it reflects the Day Sales Outstanding which has dropped significantly through the years.
It would release the cash for Gul Ahmed but might also result in lost sales and lost customers. Alkaram on the other hand maintains the ratio through the years. Debt to Equity ratio is higher for Gul Ahmed. It is too high and shows that most of the finance is from debt which means high interest payments. But this might also be a benefit if company is earning much and company is also avoiding tax by having a large part of income distributed in interest.
On the other hand alkaram also have a significant debt but much lesser than Gul Ahmed. In other terms we can say Gul Ahmed is high on risk as it has to meet interest obligations anyhow and if company ran out of cash than it might collapse and not be able to revive.
Days sales outstanding is higher for gul ahmed where as it is low for al karam which means that al karam takes comparatively less time in collecting revenues after its sales and its liabilities are low and hence it can purchase new inventory more quickly. But during the last 2 years Gul ahmed’s DSO has decreased significantly which is a good sign as it is obtaining its revenues more quickly than before.
Fixed Asset Turn over for Al karam is greater than that of Gul ahmed which means that it is generating greater revenue from its assets as compared to Gul ahmed and hence it is doing far better as compared to gul ahmed. But during the last 2 years gul ahmed has done significantly well and The ratio for the last two years has almost been the same which means that its performance is gradually increasing.