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Feasibility Analysis: Darlana Furniture

See the attachment.

Step 1: Populate the answers in the Financial ratios Word .doc chart for years 2006, 2007, and 2008 based on the financial statements in the Darlarna Furniture Ltd. case by Dan Thompson.

Step 2: Assist with notes on the following sections:

1. Liquidity
2. Asset management
3. Long-term debt-paying ability
4. Profitability

- Comment on the differences between Darlarna's ratios and the industry averages.

- Conduct a vertical analysis of income statements, balance sheets, and cash flow statements.

- Determine the trends evident in the financial statements

Describe the financial problems Darlarna currently faces in each area. Determine possible causes of each problem. Propose actions that Darlarna should take to prevent bankruptcy. Analyze the importance of using these financial ratios and statements to plan actions that would address potential problems.


Solution Preview

See the attachments.

Subject: Analyzing the financial problems Darlarna is currently facing, possible causes of the problems and actions to take to avoid bankrupty using financial ratio analysis and Vertical analysis of the company's financial statements.
In view of the drop in profits that Darlarna Furniture has experienced in the past year and the looming recession in the U.S. one of the key markets that Darlarna intends to enter, it is important to analysis the financial status of the company in order to understand how well the company can deal with such problems. This memo analyzes the financial situation at Darlarna Company, the financial problems Darlarna is currently facing, possible causes of the problems and actions to take to avoid bankruptcy using financial ratio analysis and vertical analysis of the company's financial statements.
Liquidity of Darlarna Furniture's LTD
How liquid a company is implies how easily it can be able to pay up its short term debts. Analyzing the company liquid status, it can be noted that the company's ability to meet its short term obligations have been dropping with the company becoming less liquid. This is seen by the amount of current assets that can be able to pay the current liabilities. Comparing this to the industry average of 2.5 in current ratio, the company is disadvantaged in obtaining short term financing from creditors. The cash that is available to meet these obligations as also been falling over the three year period from 0.20 to 0.02. Comparing this to the industry average of 0.5, the company is disadvantaged. Considering the fact that Darlarna is expected to maintain a current ratio of 2.0 for it to be able to get a loan from the Bank of Montreal, then, Darlarna faces the problem of not being able to obtain finances from creditors. Possible cause of this problem are its reduced capability to pay up their short term debts, and reducing cash holdings as seen by the decreasing percentage of cash held over the total assets as seen in the three year period and decreasing percentage of current in total assets from 65.8% in 2006 to 61.4% in 2008 as compared with the rising current liabilities from 26.1% in 2006 to 36.4% in 2008. In order to resolve this problem it is essential that the company seek ways of increase its current assets while reducing the current liabilities such as accounts payables.
Asset management
Inventory turnover in the company has been rising with the period the company is holding inventory reducing from 181.4 days in 2006 ...

Solution Summary

The Solution provides notes on the liquidity, asset management, long-term debt-paying ability, and profitability for Darlarna Furniture Ltd.