London Summerwear Ltd. (Lsw) – Case Study

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UNIVERSITY OF WALES
PRIFYSGOL CYMRU
TASMAC LONDON SCHOOL OF BUSINESS

Title: London Summerwear Ltd. (LSW) – Case Study
Subject: Financial Framework for Business Decisions
Level / Semester: Semester I
Programme: MBA
Subject Tutor: Dr (Mrs) Edna Stan Maduka
Name of Student: Lubna Shehzad Pirani
Student’s ID No.: 1006100
Date of Submission: August 15, 2011
Word Count: 2199 words
Word Limit: 2000 words

Table of Contents

INTRODUCTION2

FINANCIAL RATIOS: CALCULATIONS AND INTERPRETATIONS4
1.Liquidity Ratio:4
A)Current Ratio:4
B)Acid-Test (Quick) Ratio:5

2.Leverage Ratio:6
A)Debt-to-Equity Ratio:6
B)Debt-to-Total Asset Ratio:7
C)Total Capitalization Ratio:7

3.Coverage Ratios:8
A)Interest Coverage Ratio:8

4.Activity Ratio:9
A)Account Receivable Turnover Ratio:9
B)Average Collection Period:10
C)Inventory Turnover:11
D)Total Assets Turnover Ratio:11
5.Profitability Ratio:12

A)Gross Profit Margin:12
B)Net Profit Margin:13
C)Return on Investment Ratio:14
D)Return on Equity Ratio:15

RECOMMENDATIONS15
CONCLUSION:16
REFERENCES17

INTRODUCTION
The case study of London Summerwear Ltd. (LSW) began its journey five years ago under the supervision of Jill Dempsey and Mike Greaves. LSW designs and manufactures beach and leisure clothes whose target market is young with higher income level. LSW had faced many losses. They invested heavily on mortgages in order to finance the new company. There shareholders were as follows: David Keeble and John Keeble (Major shareholders), Jill Dempsey, Mike Greaves, and Jane Barker.  Arena, the causal and summer wears store has placed extensive orders with LSW that could bring a huge improvement in sales of LSW. It’s time for them to enter the industry like a shining star but suddenly LSW received a letter from the bank containing bad news asking to decrease their overdraft limit. The OD was the only way out for them to fulfil the order as they are lacking with equity. Now the company could face problems in fulfilling the new and massive order. Hopes were shattered so they finally called the Board of Directors’ meeting and decided to take an advice from external advisor. To overcome with this issue, mentioned-below financial ratios analysis, interpretations and recommendations would help LSW to find the major solutions of their problems.

FINANCIAL RATIOS: CALCULATIONS AND INTERPRETATIONS
Financial ratios are helpful to indicate the performance of a firm and its financial situation. It can be used in analysing tendencies and in comparing the firm’s financials to other firms (NetMBA Business Knowledge Center, 2010). These are categorized in: 1. Liquidity Ratio:

It helps in determining how much the company is able to cover its short-term liabilities and is useful in vital decision making (Association of Charted Accountants, 2011, pp.348). It is based on: A) Current Ratio:

The current ratio discovers if a firm can meet its short-term liabilities while keeping an account of its current assets; which calculated as: = Current Assets
Current Liabilities

Year 1: = 4356 = 1.75:1
(1214+1268)

Year 2: = 9974 = 1.13:1
(2612+1982+4250)

Interpretation:
The current ratio was decreased by 0.62 times from year 1 to year 2 and the current assets increased by 5618 in year 2 and at the same time net current liabilities increased by 6362. This indicates that there could be an increase in the investment activities in other projects over that period. B) Acid-Test (Quick) Ratio:

It captures a closer view of liquid assets of the current ratio, omitting the inventories. It is generally less than 1:1 as it is impracticable that all creditors will be requiring payments at the same time (Weetman, P., 2006, pp. 340 -341). It is calculated as: =...
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