Question

4. Sky Metals, Inc. is a metal fabrication firm that manufactures prefabricated metal parts for customers in a variety of industries. The firm’s motto is “If you need it, we can make it.” The CEO of Sky Metals recently held a board meeting during which he extolled the virtues of the corporation. The company, he stated confidently, had the capability to build any product and could do so using a lean manufacturing model. The firm would soon be profitable, claimed the CEO, because the company used state-of-the-art technology to build a variety of products while keeping inventory levels low. As a business press reporter, you have calculated some ratios to analyze the financial health of the firm. Bluestone’s current ratios and quick ratios for the past 6 years are shown in the following table:

	2010	2011	2012	2013	2014        2015	2015
Current ratio	1.2	1.4	1.3	1.6	1.8           2.2	2.2
Quick ratio	1.1	1.3	1.2	0.8	0.6          0.4	0.4

What do you think of the CEO’s claim that the firm is lean and soon to be profitable? Please explain why or why not.

Answer 1

Current Ratio= Current Assets/Current Liabilities

Quick Ratio=Current Asssets except inventory/Current liabilities

As observed from the data above, quick ratio is continuously decreasing suggesting that its liquid assets are not enough to pay for its current debt.

The current ratio is increasing suggesting inventory build up and is not getting converted to liquid assets as expected.Therefore, it does not reflect that the firm is lean or soon to be profitable